Steady as she goes
The value of any investment can fall as well as rise and investors may not get back the amount invested.
True north, in this case a long-held approach to through the cycle investing, provides a fixed point to steer by in uncertain times.
Driven by unprecedented fiscal and monetary stimulus and vaccine success, markets recovered quickly in 2020 following the outbreak of the Covid-19 pandemic. Credit markets are now priced optimistically, assuming herd immunity will be achieved over the summer of 2021, a seamless transition from fiscal stimulus to private sector recovery, and the continued maintenance of extensive policy support. However, as always, there are risks to the downside.
A slow and inconsistent roll out of the vaccine could result in the extension of restrictions, putting further pressure on corporate balance sheets. Over the longer-term, companies may not be able to rely on as much support from governments and central banks. These risks have led to concerns about a new default cycle in some quarters.
Active, through the cycle investing
It’s the role of our fund managers to set our portfolios up to weather whatever comes their way. The team seek to deliver a sustainable, long-term income for clients, not short-term yield. They do so by focusing their analysis on the resilience of the companies they lend to. In periods of uncertainty, this philosophy has been rewarding. Our range of credit funds saw a very limited impact from defaults throughout 2020, thus maintaining our long record of experiencing significantly fewer defaults than the market. We remain confident in the resilience of our holdings as we start the new year. Given the particular nature of this economic shock, emanating from a public health crisis beyond any company’s control, we continue to see a lot of support and forbearance for companies across many sectors which is keeping default rates lower than they otherwise would be. Default rates in 2020, of around 5% in Europe and 6% in the US, whilst higher than in benign market conditions, are well below the levels we’ve seen in previous financial shocks.
The big question, which will play out over the next few years, is this; will the companies which have burned through cash and increased their borrowings in order to keep the lights on, be able to grow sufficiently quickly to manage their debt commitments?
Not all companies will.
Some will therefore need to either raise equity (if they can), or face default at a later date. Our forward-looking analysis assesses our holdings against a range of possible company-specific futures: they are not simply limited to a set of macro-economic forecasts. We will therefore only lend our clients’ money to companies that are either very unlikely to require additional capital raising or will be in a sufficiently strong position to raise capital, if and when required.
Companies with resilient characteristics can be found in some of the most unlikely places. For example, within the hotels sector, we own bonds from Europe’s leading hotel group, Accor. The Mercure, Fairmont and Novotel parent company had some €4.5bn of liquidity at the end of June. Our rigorous analysis suggests that is enough for the business to survive for at least two years, on the extreme assumption of market conditions equivalent to those we saw in March 2020. In a market dominated by small, independent operators, Accor’s deep pockets will enable the company to seize acquisition opportunities at distressed prices and further grow its market share. Over the long term such success is likely to result in a reduced risk premium and a positive outcome for the bonds.
Another example is Heathrow; London's premium airport and one of Europe's largest airport hubs. Although air travel is likely to remain subdued through to 2022, we believe Heathrow's strong liquidity position, supportive shareholder base and premium location give the airport a significant competitive advantage. As a result, Heathrow is well positioned to take market share from other London airports. We expect this highly resilient business to overcome extreme market conditions and perform strongly in the long term.
Looking Beyond the Horizon
Our Fixed Income teams can continue to profit in these uncertain times. We can do so by exercising the discipline of a long-term approach, our true north, which gives us a fixed point to steer by regardless of what is on the immediate horizon. We are actively selecting the resilient companies of the future. Owning a global portfolio of such businesses, we believe, offers a terrific opportunity for future growth in both income and capital.
Accor and Heathrow are issuers we hold in various Baillie Gifford Income strategies. They both feature in the High Yield and Strategic Bond portfolios.
look to the future.
Not the past.
The views expressed are those of the Income strategy teams and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
Any stock examples and images used are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolio produced by us. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style.
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Past performance is not a guide to future returns.
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Baillie Gifford Investment Management (Europe) Limited provides investment management and advisory services to European (excluding UK) clients. It was incorporated in Ireland in May 2018 and is authorised by the Central Bank of Ireland. Through its MiFID passport, it has established Baillie Gifford Investment Management (Europe) Limited (Frankfurt Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in Germany. Similarly, it has established Baillie Gifford Investment Management (Europe) Limited (Amsterdam Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in The Netherlands. Baillie Gifford Investment Management (Europe) Limited also has a representative office in Zurich, Switzerland pursuant to Art. 58 of the Federal Act on Financial Institutions ("FinIA"). It does not constitute a branch and therefore does not have authority to commit Baillie Gifford Investment Management (Europe) Limited. It is the intention to ask for the authorisation by the Swiss Financial Market Supervisory Authority (FINMA) to maintain this representative office of a foreign asset manager of collective assets in Switzerland pursuant to the applicable transitional provisions of FinIA. Baillie Gifford Investment Management (Europe) Limited is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co.
La presente oferta se acoge a la Norma de Carácter General N° 336 de la Comisión para el Mercado Financiero (CMF) de Chile. La presente oferta versa sobre valores no inscritos en el Registro de Valores o en el Registro deValores Extranjeros que lleva la Comisión para el Mercado Financiero, por lo que los valores sobre los cuales ésta versa, no están sujetos a su fiscalización. Que por tratarse de valores no inscritos, no existe la obligación por parte del emisor de entregar en Chile información pública respect de estos valores. Estos valores no podrán ser objeto de oferta pública mientras no sean inscritos en el Registro de Valores correspondiente.
The securities have not been, and will not be, registered with the Colombian National Registry of Securities and Issuers (Registro Nacional de Valores y Emisores) or traded on the Colombian Stock Exchange (Bolsa de Valores de Colombia). Unless so registered, the securities may not be publicly offered in Colombia or traded on the Colombian Stock Exchange. This presentation is for the sole and exclusive use of the addressee and it shall not be interpreted as being addressed to any third party in Colombia or for the use of any third party in Colombia, including any shareholders, managers or employees of the addressee. The investor acknowledges that certain Colombian laws and regulations (including but not limited to foreign exchange and tax regulations) may apply in connection with the investment in the securities and represents that is the sole liable party for full compliance therewith.
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The interests in the following securities have not and will not be registered in the National Registry of Securities maintained by the National Banking and Securities Commission, and therefore may not be offered or sold publicly in Mexico. The interests in the following securities may be offered or sold to qualified and institutional investors in Mexico, pursuant to the private placement exemption set forth under Article 8 of the Securities Market Law as part of a private offer.
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