1. Muscle for
    the Rebound

    Torcail Stewart
  2. December 2020

    The value of an investment in the fund, and any income from it, can fall as well as rise and investors may not get back the amount invested.

  3. Challenging circumstances function as a litmus test, from which the strongest business models survive, and even, thrive. During 2020 your Strategic Bond Fund has sought to invest in businesses that can do just that.

    In basketball, controlling the ‘glass’ (the backboard) matters. Teams which dominate the board, dominate the leader table. Success is not just reliant upon first shot baskets, but on having the resilience and tenacity to make-good on mistakes, to follow-up with strength and, importantly, to make rebounds count. It is no surprise that in the 2018-19 NBA Eastern and Western Conference standings, the teams in the top half of the table had, on average, the most successful rebounds per game. Indeed, over the last two years, the Milwaukee Bucks, with a rebound rate last seen in the late 70s, have convincingly topped the Eastern Conference League. 

    Positively responding to mishaps, as any sports psychologist will tell you, is crucial to long-term success and so it is the case for corporate strategy. The present Covid-19 crisis has significantly impacted certain sectors and the sales drops experienced have typically exceeded that of the Global Financial Crisis. Yet, these very challenging circumstances function as a litmus test, from which the strongest business models survive, and even, thrive.

    It is with this mindset that during the crisis, the Strategic Bond Fund actively sought to identify businesses that have the muscle to rebound. The sectors we targeted include hotels, aviation, energy and hospitality. In all sectors we have found opportunities on attractive yields. The key being not to target the most distressed companies, rather those where liquidity was excellent, long-term business model sound and valuation compelling. In effect, target the survivors, where long-term market share gains are likely.

    Within the hotels sector, we purchased bonds from Europe’s leading hotel group, Accor. Following an asset sale, Accor had €4.5bn worth of liquidity at the end of June. Enough funds for the business to survive at least two years, even if assuming demand conditions equivalent to 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 grow its market share.



    A similar case in aviation may be made for low-cost airlines and strategically important hub airports. Ryanair has excellent liquidity, a material cost advantage and, through the delivery of new Boeing planes, will further its cost and emissions leadership versus its peer group. Ryanair is poised to expand route coverage and take market share from many of its less financially-sound rivals. Beyond Ryanair bonds, we have also purchased those of hub airports Heathrow and Fraport. Past aviation cycles have shown that in periods of retrenchment hub airports benefit at the expense of regional ones. The monopolistic nature of these airports and their systemic importance to their countries makes them very secure companies to lend to. Indeed, in more normal times such bonds are often hard to source, so being able to buy them on elevated yields is a fantastic opportunity.

    The current restrictions on movement that many of us are experiencing is frustrating, but with successful vaccines on the horizon, our circumstances will soon be changing. We believe the market may be surprised by the rapid rebound in demand for Covid-impacted sectors as people naturally seek to expand their spatial horizons. This cork-popping moment may have a positive impact upon corporate bond risk premiums, especially if prices charged in these sectors rise to accommodate reduced supply.

    Indeed, there’s no time like the future.


    This communication does not constitute, and is not subject to the protections afforded to, independent research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.

    This communication was produced and approved in December 2020 and has not been updated subsequently. It represents views held at the time of recording and may not reflect current thinking

    The views expressed are those of the Torcail Stewart 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.

    Bonds issued by companies and governments may be adversely affected by changes in interest rates, expectations of inflation and a decline in the creditworthiness of the bond issuer. The issuers of bonds in which the fund invests may not be able to pay the bond income as promised or could fail to repay the capital amount.

    Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA).

  5. Actual Investors
    Imagine 'what if?' 

    Not 'what is'.