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Investment Vehicle Manager Market & Portfolio Commentary - December 2020

28.01.2021

As we drew a close to a tumultuous year for financial markets, December was another firm month. The market shrugged off the rising Covid-19 infections and instead looked forward to the roll-out of the vaccine which started in some countries in December. US equity markets continued their rally during the month and the S&P 500, Dow Jones Index and MSCI World Index all closed at record levels on the last day of the year. The positive sentiment was further supported by the agreement of a trade deal between the EU and the UK in the long running Brexit saga, as well as the additional stimulus in the US which President Trump signed off on 27 December.

European Sub Investment Grade Highlights

The Credit Suisse Western European Leveraged Loan Index, hedged to Euro, was up 0.61% for the month, which brings Year to Date ("YTD") returns to 2.38%. Cyclicals (0.63%) again outperformed defensives (0.57%) but by a narrower gap compared with previous months. As at the end of December, the 3-year discount margin on the index was 459bps. The Credit Suisse Western European High Yield Index, hedged to Euro, was up 0.94% for the month bringing YTD returns to 1.95%.

Within the performing book, the strategy set forth in the initial months of Q4 continued throughout the month of December: realizing gains on low coupon exposure at attractive levels, while rotating into accretive opportunities in both primary and secondary markets. As the US primary market offered attractive risk-reward, the fund closely monitored the opportunity set and selectively participated in a number of new deals. We also initiated new positions within the performing book in the secondary market, capitalizing on disruption across a handful of US-based utilities offering attractive risk-adjusted returns. The book is well-positioned heading into 2021 for consistent income generation and stable risk-return. As of December close, performing credit (including cash) was at 42.1% of the portfolio with a weighted average price of 97.9, trading at a YTM of 4.5%, delivering 4.4% cash yield to the portfolio.

The credit opportunities book continued to remain agile and active given the backdrop of improved risk sentiment heading into year-end. With a number of core positions trading at or above our current view of fair value, we right-sized certain positions at attractive levels, while re-deploying cash into names offering superior risk-adjusted returns. The fund also took advantage of temporary liquidity pockets when opportunities arose by de-risking certain positions with below-average liquidity profiles. Finally, the team continued to focus on screening new credit opportunities, and initiated a position in a global telecommunications company with debt trading at a discount with a near-term upside catalyst forthcoming. On the final day of the year, one of the fund's core credit opportunities positions was unexpectedly pre-paid at par - this term loan, backing a logistics business, traded at a deep discount throughout 2020, and its pay-down marked the end of a successful investment while validating our willingness to hold conviction positions throughout volatility. Within the structured products book, we took prints on a handful of positions through a successful BWIC (Bid Wanted in Competition), realizing gains on a few line items that we sourced when structured credit spreads were trading materially wider. We remain constructive on the CLO market and we have traded some line items both in the primary and secondary markets to optimise our positioning going into 2021. We believe the credit opportunities book continues to be well-positioned, with a number of event-driven trades anticipated to materialize in the coming months. As of December close, credit opportunities was 57.9% of the portfolio, trading at a weighted average price of 89.9 and a YTM of 8.8%, whilst delivering a 6.6% cash yield to the portfolio.

Across the entire portfolio, as of December month end, the weighted average market price was 93.6, trading at a YTM of 7.0%, and delivering 6.6% cash yield (on a levered basis) versus a weighted average price of 94.7, YTM of 6.6% and cash yield of 5.7% as of December 2019. Floating rate instruments comprised 83.5% of the portfolio. Senior Secured 83.8%. The portfolio had a cash position of 4.4% (including leverage) with leverage at 1.3x assets.

The fund continues to outperform the broader market following the original pull back of March and subsequent rebound. Our active trading strategy has been in full-force in recent months, and we believe our willingness to hold attractive assets throughout market volatility has been a key driver of recent outperformance. We continue to focus on new opportunities in both performing and credit opportunities books, while selectively identifying attractive investments in both primary and secondary markets.

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