The Federated Hermes Unconstrained Credit Fund celebrated its third anniversary
on 30 May 2021.
We look at the portfolio from five angles to see what makes it different to its peers and why investors should be looking at credit in their portfolios today.
Presenting the Federated Hermes Unconstrained Credit Fund
Fraser Lundie, Head of Credit and co-lead portfolio manager of the Federated Hermes Unconstrained Credit Fund since its launch three years ago, provides a snapshot of the five key attributes of the fund.
By combining unconstrained, high-conviction credit selection with a hedge against adverse market conditions, he says the fund aims to maximise long-term total returns for investors.
FOR PROFESSIONAL INVESTORS ONLY
Lundie says: “From an income perspective, credit is probably more important than ever and it also provides decorrelation and diversification to the broader spectrum, as well as an element of downside protection.”
Fraser Lundie, head of credit and co-lead manager of the fund, explains that unconstrained credit is designed to provide investors access to credit markets in a manner that is unconstrained by traditional benchmarks or traditional ways of investing.
Unrestricted by security type or geographical silos, the fund looks to exploit opportunities in developed and emerging markets for investment grade and high-yield corporate bonds, credit default swaps, loans, asset backed securities, government securities and other credit derivatives.
In what is really quite a dramatic ‘search for yield’ backdrop, Lundie argues credit stands alone at the moment in terms of offering investors sensible levels of yield.
30 MAY ‘18
“The strategy selects from the best long-only credit ideas of the Federated Hermes Multi-Asset Credit Investment Committee, which combined with a dynamic asset allocation framework, offers the potential to enhance our team’s ability to achieve positive absolute returns through the market cycle,” says Lundie.
The Federated Hermes Unconstrained Credit Fund aims to generate capital growth and a high level of income over time.
To achieve this, investing in 195 securities, the fund combines top-down allocation across global liquid-credit spectrum with bottom-up, high conviction security selection. This is complemented by an options overlay which aims to provide a defensive hedge against down markets.
Source: Federated Hermes
Number of issuers
Fund assets under management
as at 31 May '21
Lundie says that since the strategy’s inception, the use of options has enabled the managers
to have higher conviction in their credit selection and maintain risk during market sell offs, enabling the fund to participate in rebounds as markets rally.
The value of investments and income from them may go down as well as up, and you may not get back the original amount invested.
“It allows us to build portfolios with a forward-looking, ESG-lens in mind and this is where I think the real opportunity set lies,” says Lundie.
Unlike other credit and strategic bond funds, the Federated Hermes Unconstrained Credit Fund uses options to provide a level of downside protection rather than government bonds.*
Lundie says the fund’s global approach to investing in credit, combined with investing in securities from a sustainability perspective, also makes the strategy unique from a bottom-up analysis and credit committee perspective.
Working closely with EOS at Federated Hermes, a leading stewardship provider, Lundie says the fund does not just look at a company as a viable investment, but they are considering it in terms of their decarbonisation policy, how open to engagement they are and to what extent they are sustainable leaders.
The team collaborates with
a leading stewardship provider
*Downside protection is not guaranteed.
Lundie says: “The team’s diversity in terms of specialist portfolio managers (such as emerging markets, loans and asset backed securities) and credit analysts provides Andrew and I with views and trade ideas that can be leveraged across credit strategies and products.”
With a combined experience of over 40 years, Lundie and co-manager Andrew Jackson, head of fixed income at the international business of Federated Hermes, have managed a spectrum of funds during downturns and crises.
Principal team members have worked together since 2004 implementing relative-value credit strategies, forming the core of an experienced and integrated team.
In total the international business of Federated Hermes has over 30 fixed income specialists, managing over $5.4bn as at 31 March, 2021.
Lead managers have
combined industry experience
in Fixed Income as at 31 March '21
The fund hit its third anniversary on 30 May, 2021.
Reflecting on the fund’s first three years, Lundie says: “We set ourselves a very ambitious target and we are pleased that we have managed to surpass this. We have achieved this by investing on a through-the-cycle basis, but also maintaining an element of dynamism and nimbleness.”
As at 31 May 2021 the assets under management in the strategy stood at $0.95bn.
The Yield to Maturity is 3.39% (31 May 2021).
Rolling performance (%)
Past performance is not a reliable indicator of future results.
Source: Federated Hermes as at 31 May 2021.
Performance presented in USD, net of fees and charges. Fund inception: 30 May 2018.
The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Any investments overseas may be affected by currency exchange rates. Past performance is not a reliable indicator of future results and targets are not guaranteed.
Where the strategy invests in debt instruments (such as bonds) there is a risk that the entity who issues the contract will not be able to repay the debt or to pay the interest on the debt. If this happens then the value of the strategy may vary sharply and may result in loss. The strategy makes extensive use of Financial Derivative Instruments (FDIs), the value of which depends on the performance of an underlying asset. Small changes in the price of that asset may cause larger changes in the value of the FDIs, increasing either potential gain or loss.
For professional investors only. This is a marketing communication. This document does not constitute a solicitation or offer to any person to buy or sell any related securities, financial instruments or products; nor does it constitute an offer to purchase securities to any person in the United States or to any US Person as such term is defined under the US Securities Exchange Act of 1933. It pays no regard to an individual’s investment objectives or financial needs of any recipient. No action should be taken or omitted to be taken based on this document. Tax treatment depends on personal circumstances and may change. This document is not advice on legal, taxation or investment matters so investors must rely on their own examination of such matters or seek advice. Before making any investment (new or continuous), please consult a professional and/or investment adviser as to its suitability. All figures, unless otherwise indicated, are sourced from Federated Hermes.
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