We’ve seen a shift in market leadership. Last year, technology related names were seen as a defensive play, but that has changed this year. Despite good earnings growth, we are seeing compression in multiples and the market shifts its emphasis from growth to cyclical stocks.
The considerable unwind of high-growth names that fuelled 2020’s rally over the last 3 months combined with the cheapening of their convertible bonds has created an attractive entry point for exposure to areas such as cybersecurity, online food delivery, telehealth, renewable energies, e-learning, semiconductors and cancer diagnostics.
While we have been tactically more cautious on equities since late January, we have increased again our equity sensitivity during the market correction, from 48% at end April to 56%[1] at end of May, because we still believe that the longer-term fundamentals are strong, given the vaccine rollouts and the gradual reopening of economies. However, we remain positioned on the most convex segment of the valuation curve as we hold 85% of balanced profiles.
Consumer discretionary shines
As part of our rotation into more value names as economies reopen, we have benefited from holdings in the consumer discretionary and industrials sectors. Conversely, communication services companies made relative negative contributions to returns given our underweight in that space.
Small and mid-cap focus
Camera manufacturer GoPro, X-ray imaging components company Varex Imaging Corporation and shipping company Pacific Basin were among the top individual contributors to performance. Like a number of our strongest performers, these were primarily small- and mid-cap stocks not included in the benchmark. 50% of the portfolio is in securities with a market cap below $5 billion, in interesting market niches which attract less attention, and 63% of them sit outside the index[2].
Primary market
We’ve also seen almost 400 new issues over the last 12 months, accounting for more than 50% of the market[3] – a new and significant opportunity. Many of the new convertible deals we are seeing came more recently from retail issuers such as Twitter Airbnb or Spotify, offering large converts with aggressive pricing terms given their high equity valuations, elevated stock volatility and strong investor demand. Amid concerns over rising rates and the rotation out of growth and into value, we believe that these are names more likely to benefit from the economy reopening.
We have broadly stayed away and not been considering these from day one. However, winners will emerge and we are waiting for the right price. As a consequence, we did see some technical pressure on the secondary market with such a high volume of issuance, which reduced theoretical valuations slightly, but we see today valuation as a greater source of alpha than medium-term risk for the asset class.
Fund strategy and outlook
The peak of the cycle is getting closer, but we believe that it’s still too early to turn defensive. This is because monetary conditions and excess liquidity remains supportive as central banks give higher inflation the benefit of the doubt while earnings fundamentals are strong and reflation is more favourable to equities than bonds.
We are maintaining strong fixed income characteristics. Given the market environment, we have a short duration of 4 years and we expect more tightening in high-yield credit spreads. The fund is also overweight cyclical sectors, due to the reopening narrative. In terms of country exposure, we are overweight Asia and Japan as it is a traditional global cycle play, with positive correlation to bond yields and to Purchasing Managers Index direction. We are back to neutrality in the US but maintain an underweight position in Europe as politics and a stronger euro are potential risks.
In summary, we will continue to focus on cyclical exposure, short duration and small and mid-cap stocks as the next leg of the growth rebound is set to be accompanied by higher bond yields, helped by rising inflation and the hand-over from monetary to fiscal easing. We believe 2021 should continue to be a stock picker’s paradise as dispersion and volatility are likely to be high. In this environment, we’ll use any bouts of volatility to take advantage of attractive opportunities.
Mirabaud – Sustainable Convertible Global Fund: annual performance
| 2021 | 2020 | 2019 | 2018 | 2017 | 2016 |
Fund (I Cap USD) | 4.56% | 33.48% | 16.70% | -6.30% | 6.17% | 1.92% |
Benchmark | 1.49% | 22.84% | 13.10% | -3.01% | 6.00% | 1.59% |
2021 number are to 31 May 2021. Benchmark is Rifinitiv Global Focus CB Hedged USD. Past performance is not indicative or a guarantee of future returns.
[1] Mirabaud Asset Management
[2] Mirabaud Asset Management, 31 May 2021
[3] Nomura, Mirabaud Asset Management, 31 May 2021
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