Necessary ingredients for a recovery are coming into clearer focus, says portfolio manager
As hope gathers that an economic and medical recovery is coming, one fund is focusing on two areas: rebounders and growth.
Geoff Castle, who manages the Pender Corporate Bond Fund, said that while the current investing environment is beset with economic problems that have arisen due to the coronavirus pandemic, each day now brings signs of optimism.
On the financial side, governments and central banks continue to throw every thing they have at rescue packages and asset-purchase programs, while on the health side, diagnostics tests for COVID-19 are getting better, faster, and are more widespread. Treatments like anti-viral drug Remdesivir are beginning to show good results in patient trials and the push for a viable vaccine continues.
“Six weeks ago we had hope alone,” Castle said. “Now, the necessary ingredients for recovery are coming into clearer focus. While disappointments and setbacks may arise here and there, there is hope that a recovery is coming.”
The portfolio manager has taken this positive outlook into the fund to examine areas of rebounders and new growth. He believes some rebounding securities can be found in areas impacted by the pandemic’s economic standstill, such as travel, oil and gas, construction, food service, and commercial real estate. Other areas of rebound potential relate to securities whose issuers were relative bystanders in the economic disruption; bonds priced much lower as part of a general liquidation event.
He explained: “Our enthusiasm here, while strong, is nuanced according to capital structures. In some cases, the performance of senior debt in hard-hit industries may be significantly better than equity. But, speaking generally, we like companies participating in enduring industries that should expect a profit recovery.
“Our chief considerations in evaluating rebounders include the magnitude of price recovery as well as our degree of confidence in price recovery for the particular security. By magnitude we are really thinking in terms of ‘points’ of recovery in a credit. Two securities can have the same yield, but the lower priced security may have a greater percentage return potential.”
Secured credits or securities that sit on a large buffer of equity are also good for confidence, particularly when dealing with companies that are stressed.
When it comes to growth sectors, the fund is eyeing those that benefit from the current environment like healthcare, especially in areas that have a relevant product offering to the virus.
“Accelerate Diagnostics Inc, where we hold convertible debt, is one such example,” Castle said. “Another area is precious metals miners, including silver producers. We see some future potential for increased precious metals investment demand arising from concerns related to large creations of fiat cash and the potential for future debt monetization.
“A third area is communications technologies, particularly those supporting remote work or e-commerce, such as our investment in Avaya Holdings. In these ‘growthier’ areas, our securities focus relies more on buying bonds possessing near-the money equity conversion rights.
“Our long-term holding of convertible bonds in Osisko Gold Royalties is an example of this type of growth-oriented position ... a solid credit, underpinned by an equity value of several times total debt, but which also offers upside through convertible strike prices that are close to the current market.”
