Global credit funds & CLO's
June 2020 | Issue 224
Published in London & New York.
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Opinion investment grade
Alexandra Wilson-Elizondo
Alexandra
Forced selling triggered by downgrades has created crossover opportunities
Senior portfolio manager
MacKay Shields
June 2020 | Issue 224
Born: Bryn Mawr, Pennsylvania
Lives: Tribeca, Manhattan
Education: MBA at New York University and BA at Haverford College, majoring in economics
Fun fact: Wilson-Elizondo and her dad are ‘gear heads’ and are attending the Ford Performance Racing School in November
Last holiday: Hong Kong
Favourite movie: National Lampoon’s Christmas Vacation. “It’s a perfect blend of slapstick comedy and heartfelt moments”
MacKay Shields: MacKay Shields was founded in 1938 as an economic consulting firm by Gilbert MacKay and was acquired by New York Life in 1984. It has about $120 billion in assets across credit and equities
Career: Wilson-Elizondo started her career at Vanguard in 2008 as an ETF [exchange traded funds] trader. She went on to lead corporate credit risk for Vanguard’s fixed income index funds. In 2015 she joined Mackay Shields where she is a member of the investment policy committee and portfolio manager for investment grade credit strategies, as well as a portfolio manager on the high yield strategies and index/ETF products
Bucket list: Learn to play the Spanish guitar
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Q. What are the best and worst investments in credit today?
A. The most attractive opportunities are in the crossover space. Forced selling triggered by downgrades has created opportunities to purchase the bonds of companies with strong balance sheets trading at 70-80 cents on the dollar. These represent potential double-digit total return opportunities, with optionality around credit improvements. The worst opportunities are in the ‘don’t fight the Fed’ trades post its market support announcement. The markets’ front running of the Fed has led to crowded positioning and indiscriminate buying in the front end of the investment grade curve, where not all credit is created equal.
Q. How has coronavirus affected the relative value between IG and HY?
A. Covid-19 has triggered a large number of ratings actions forcing IG balance sheets into HY. Interestingly, because a vast majority of the IG market re-priced due to liquidity and not just credit issues, IG bonds are entering the HY index, already trading at or even wide to high yield comparables. This makes the existing HY relative value matrix look very rich versus these bonds, and makes issuers that can hold onto IG ratings, and stay eligible for Fed programmes, extremely attractive to own versus high yield names.
Q. What is the best credit trade you made?
A. Recently, the best trade was buying single-A, high-quality balance sheets at the peak of the liquidity-based sell off in the first quarter. Single A-rated bonds widened more on a percentage basis than triple Cs because of liquidity dynamics, and buying these bonds in the secondary and primary markets at deep discounts or large concessions resulted in some bonds returning over 50% in a matter of months, outperforming distressed debt, high yield bonds and equities.
Q. What is the worst trade you have made?
A. It was the result of not becoming an extreme sceptic quick enough when becoming a portfolio manager. For a credit PM in particular, you have to question everything a management team tells you, and decide for yourself if they are believable or not.
Q. Who is your inspiration?
A. I admire Jamie Dimon, as he did not have an easy path, with several setbacks, yet persisted. He has a style of saying what he believes, no matter how unpopular, and leading with common sense.
Q. Where is the market heading?
A. We believe the default cycle is only beginning, but in a world awash with negative yielding debt and central banks writing puts to the market, high-quality credit has many benefits and will likely go tighter. Spreads as a percentage of total yield remain historically high and are compensating for a lot of the recessionary environment. However, credit selection is paramount to avoid the coming credit impairment driven by high corporate leverage and changing consumer preferences.
Q. What needs to change about the way our industry does business?
A. Dealer trading protocol needs to change — particularly the consistency of prices and managing expectations around when you can get liquidity. It’s tough managing a bond portfolio when you have no idea if a dealer will even send a price on your bond that day, let alone try and get liquidity for it.
Q. Where do you see future opportunities for your business in credit?
A. ESG [environmental, social and governance] adoption is accelerating because, at the end of the day, incorporating ESG in fundamental credit research is just good investing. Having the ability to innovate and structure this evolving part of the market will enable us to best serve our clients and grow our business.
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