The Pacific Coolabah Global Active Credit Fund outperformed its benchmark in February. As of 29 February, the Fund’s weighted average yield to expected maturity is 5.92%, which compares favorably with the benchmark yield of 5.01%.
Despite global inflation readings continuing to come in higher than economist expectations, equity markets climbed to new highs, driven by hopes for AI-led productivity gains and interest rate relief. The AI poster-child, NVIDIA, posted healthy results and its shares appreciated 28% during the month, driving the S&P500 to break the symbolic 5,000 mark. Notably, the Nikkei 225 index also reached a new record, surpassing the previous mark set in 1989.
In February, the 10-year US Treasury yield increased by approximately 35 basis points to 4.25% while 10-year German Bund yields rose 25 basis points to 2.41%. Despite this move higher in sovereign bond yields, equity returns were strong with the S&P 500 up 5.3% on a total return basis and the Eurostoxx 50 up 5.1%. Credit spreads also tightened, with the widely followed CDX index of US investment grade corporates tightening by 4 basis points, albeit approximately 1.5 basis points off the lowesr levels seen intra-month. In corporate bonds, European issuers slightly outperformed their US counterparts, with the average credit spread on European names tightening 9 basis points to 1.20% whereas US spreads were, on average, unchanged at around 0.95%.
The Fund’s out-performance in February was partly attributable to primary market activity, amongst other alpha levers. The Fund participated in deals from a wide variety of US, European and Asian institutions. The Manager’s proprietary pricing models identified that Floating-Rate Notes were attractive relative to their fixed-rate counterparts and the Fund was able to take advantage of a number of primary deals from issuers such as BPCE (French bank), Credit Mutuel and Lloyds. Outside of financials, the Fund also participated in corporate deals from large US pharma companies Bristol Myers Squibb and Abbvie as they sought financing for recent M&A activity, as well as Telstra, an Australian telecoms company.
Towards the end of the month, the Manager identified early signs of extended valuations in some sectors with many primary deals coming close to, or even more expensive than, their quantitative estimates of fair value.
