At a high level it is possible to decompose the return drivers of global investment grade corporate bonds into six areas: rates; geographic regions; currency exposures; credit ratings; industries/sectors; and issuers and issues.
For Capital Group, this diversity implies more potential sources of total returns as well as alpha/excess returns over a market cycle.
Based on the market/currency in which bond issuance occurs, the universe comprises around 80% North America and 20% Europe. However, the individual markets’ rate structures vary considerably, being much longer (in terms of years duration) in the UK and US than elsewhere, so we focus on duration-weighted market exposures when looking at our portfolios.
Insights from our Portfolio Strategy Group, and our global rates and economics teams, lead periodically to tightly controlled active rates exposures. However, we believe that our fundamental bottom-up credit decisions, rather than non-credit factors, should drive portfolio excess returns. Therefore, we closely monitor various duration metrics, such as portfolio duration, active duration (i.e. duration versus the index) and key rate duration (i.e. rate sensitivity around key nodes along the yield curve).
By geography, issuers from 57 countries have bonds outstanding in the global investment grade corporate bond space, with US-domiciled issuers accounting for around half1. Given Capital Group’s focus on fundamental bottom-up analysis and issuer valuations, our strategy weightings to different countries by issuer domicile tend to be the result of an aggregation of securities we favour.
However, our macroeconomic and political research team does give context to our analysts’ decision-making. Having a deep well-established, extensive global footprint is key to covering this diversity of geographies.
Currency movements often dominate bond returns, so global corporate bond portfolios tend to be FX hedged.
Indeed, given our preference for fundamental bottom-up credit decisions to drive excess returns, we fully hedge bond exposures back to USD, and do not undertake any active FX overlays.
At least one of the big three ratings agencies (S&P, Moody’s and Fitch) assigns a credit rating to virtually every bond issue. However, given our focus on fundamental bottom-up analysis and issuer valuations, our weightings to different credit rating bands are primarily the result of an aggregation of securities where we have high conviction. That said, rating bands remain important from a valuation perspective.
Industries / sectors
Within corporate bonds, there are three broad industry categories – industrials, financials and utilities. There are also numerous sectors, which can be further divided into sub-sectors. This means that we can potentially add a great deal of value, as our analysts are sector-aligned and specialists in their domains.
As well as undertaking desk-based research and analysis, attending industry conferences and making company visits, they also actively engage with their other sector counterparts in the high yield and equity teams. Sectors that are not in the index – such as government securities (primarily US Treasuries), government-related securities (often government-owned banks and utilities) and cash – also help with excess return generation.
Issuers and issues
There are 2,500 corporate issuers, and 12,500 distinct bond issues, in global corporate bond market indices. This is where we look to add most value consistently over the cycle.
Our analysts spend most of their time researching individual issuers and can also leverage their equity team counterparts’ parallel research.
How is Capital Group Global Corporate Bond Fund (LUX) positioned for the current market environment?
The COVID-19 crisis caused heightened volatility in corporate bond markets, including a sharp sell-off in March. This led to an unprecedented level of support from central banks and governments, including the purchase of US corporate bonds by the Federal Reserve for the first time. While economies have gradually reopened, uncertainty and risks remain.
While we adopt a long-term approach, this does not necessarily mean that we will always hold only a set of high conviction positions for a long period of time and simply ‘ride out’ volatility with low turnover. Our investment teams are very comfortable taking advantage of market dislocations, which is exactly what they have done recently. For example, our analysts took advantage of the new issues in March that came to the market at attractive spreads.
The portfolio is currently slightly overweight energy, but with a significant proportion of that concentrated in high-quality issuers and shorter dated paper. Portfolio managers have, however, been selectively adding to BBB-rated high conviction views in that space over the past few months as markets stabilised. But a lot of uncertainty remains, and the portfolio continues to emphasise sectors that are likely to continue to do well in a potentially volatile market environment. For instance, we are overweight utilities.
Developments related to COVID-19 continue to be a key driver of investor sentiment and are likely to result in renewed market volatility, at least in the near to medium term. Therefore, we believe it is imperative to maintain a balanced and diversified approach, with a strong focus on active fundamental research: this plays to Capital Group’s core strength. In the current market environment, dispersion across sectors and bottom-up security selection are more important than ever.
Past results are not a guarantee of future results.
 As at 31 December 2019. Source: Bloomberg
 Data as at 28 May 2020 based on the Bloomberg Barclays Global Aggregate Corporate Index. Source: Bloomberg
FOR PROFESSIONAL / QUALIFIED INVESTORS ONLY
This material is a marketing communication.
Risk factors you should consider before investing:
• This material is not intended to provide investment advice or be considered a personal recommendation.
• The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
• Past results are not a guide to future results.
• If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease.
• The Prospectus and Key Investor Information Document set out risks, which, depending on the fund, may include risks associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.
This material is intended for the internal and confidential use of the recipient and not for onward transmission to any other third party. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.
This material is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities. The information provided in this communication is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.
This material is issued by Capital International Management Company Sàrl ("CIMC"), unless otherwise stated, which is authorised and regulated by the Luxembourg "CSSF"- Commission de Surveillance du Secteur Financier. CIMC manages the Luxembourg based UCITS fund(s), organized as a SICAV, which is a (are) sub-fund(s) of Capital International Fund.
In Asia excluding Japan, this material is issued by Capital International, Inc. ("CIInc") which is regulated by the Monetary Authority of Singapore (MAS) and the Securities & Futures Commission (SFC) of Hong Kong.
In Australia, this material is issued by Capital Group Investment Management Limited (ACN 164 174 501 AFSL No. 443 118), located at Level 18, 56 Pitt Street, Sydney NSW 2000 Australia.
The fund(s) is (are) offered only by Prospectus, together with any locally-required offering documentation. In Europe, this is the Key Investor Information Document, in Singapore the Product Highlights Sheet and in Hong Kong the Product Key Facts Statement. These documents are available free of charge and in English at capitalgroup.com, and should be read carefully before investing. The material is not intended to be distributed or used by persons in jurisdictions which prohibit its distribution.
For Austria: A full list of Paying Agents is located on the website stated.
For Denmark: The fund is recognised by Finanstilsynet (Danish FSA) for distribution to the public in Denmark.
For Finland: The fund is recognised by Finanssivalvonta - Financial Supervisory Authority (FIN-FSA) for distribution to the public in Finland.
For France: The details of the CORRESPONDANT CENTRALISATEUR are provided on the website stated.
For Germany: A full list of Paying Agents and Distributors is located on the website stated. All legal documentation mentioned in this disclaimer are available in hard-copy and free of charge from the Paying Agent. The fund is also regulated in Germany through its branch by the Bundesanstalt für Finanzdienstleistungsaufsicht, (BaFin).
For Hong Kong: Capital International, Inc. ("CIInc") is the appointed Hong Kong Representative of the Fund. The material has not been reviewed by the Securities and Futures Commission.
For Ireland: Copies of the Prospectus, the Key Investor Information Document, the annual and semi-annual reports are available on simple request and free of charge in English at the facilities agent J.P. Morgan Administration Services (Ireland) Limited, J.P. Morgan House International Financial Services Centre, Dublin 1, Ireland as well as on capitalgroup.com/europe where the latest daily prices are also available. Income may fluctuate in accordance with market conditions and taxation arrangements. Past performance may not be a reliable guide to future performance. Changes in exchange rates may have an adverse effect on the value price or income of the product. The Prospectus and Key Investor Information Document set out risks, which,
depending on the fund, may include risks associated with investing in emerging markets and/or high-yield securities these emerging markets are volatile and may suffer from liquidity problems.
For Italy: A full list of Paying Agents and Distributors is located on the website stated. The fund is also regulated in Italy through its branch by the Commissiore Nazionale per le Societa e la
For Korea: Inquiries regarding investment in any fund product available for sale in Korea should be addressed to our local distributor, Samsung Securities Co., Ltd. Samsung Main Bldg., 67, Sejong-daero, Jung-gu, 100-742 Seoul, Korea.
For Nordics: The fund has been recognized by the Norwegian, Swedish, Danish, and Finnish regulators for distribution to the public in Norway, Sweden, Denmark, and Finland. For Norway: The fund is recognised by Finanstilsynet the Financial Supervisory Authority of Norway for distribution to the public in Norway.
For Singapore: Capital International, Inc. ("CIInc") is the appointed Singapore Representative of the Fund. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
For Spain: To obtain a list of distributors of the fund please visit CNMV.es. Capital International Fund (CIF) is registered with the Comisión Nacional del Mercado de Valores (‘CNMV’) under the number 983. The fund is also regulated in Spain through its branch by the Comisión Nacional del Mercado de Valores (CNMV).
For Sweden: The representative agent in Sweden is Nordea Bank AB, Smålandsgatan 17, 105 71 Stockholm, Sweden.
For Switzerland: The Representative in Switzerland: Capital International Sàrl, 3 place des Bergues, 1201 Genève. Paying agent in Switzerland for CIF: JPMorgan (Suisse) SA, 8 rue de la Confédération, 1204 Genève. For Taiwan: Inquiries regarding investment in any fund product available for sale in Taiwan should be addressed to our local Master Agent, Ezfunds Securities Investment Consulting Enterprise Ltd., 5F.-1, No.22, Ln. 407, Sec. 2, Tiding Blvd., Neihu Dist., Taipei City 114, Taiwan. For UK: Compensation will not be available under the UK Financial Services Compensation Scheme.
All Capital Group trademarks are owned by The Capital Group Companies, Inc. or an affiliated company in the U.S., Australia and other countries. All other company names mentioned are the property of their respective companies.
The information in relation to the index is provided for context and illustration only. The fund is an actively managed UCITS. It is not managed in reference to a benchmark.
© 2020 Capital Group. All rights reserved.