Below is a letter from Arcano Europe. Manuel Mendivil, who manages Arcano a European high yields and loans fund. THe fund has immpressive performance since inception (and AUM > €200M). He worked in NY and London for more than a decade in companies like Merrill Lynch where he’s last role was managing director in the Asset Finance and Principal Strategies unit.
May was again a positive month for European credit assets – this time not just relative to equities but also in comparison with other fixed income asset classes such as IG and sovereign bonds. In fact, credit has been remarkably resilient in the last 4-6 weeks of global rates and equities sell-off, in particular short duration credit strategies like Arcano’s experienced a strong month. The reasons are twofold: i) consensus is that this is not the start of a sustained back-up in yields, and ii) solid credit fundamentals, in particular low default rates, hence credit spreads continue to offer an attractive value proposition. The iTraxx X-Over index remained flat (286 vs 275) and High Yield and Loan Indexes (CS Euro HY Index +0.31%, CS Euro Lev Loan Index +0.50%) outperformed equity markets (Eurostoxx 50 -1.24%).
Arcano European Income Fund Performance
The Net Asset Value of the Arcano Fund I Ba share Class increased by +0.76% in May, supported by strong performance in the second half , resulting in +5.13% net YTD and +29.40% net since inception. Our investment activity continued to focus on the primary market. Market default rates are likely to remain low for the next 2 years, whilst the Fund has not suffered a single default since inception in 2011. The portfolio YTM stands at 5.6%, representing an attractive risk adjusted return considering the fund’s low volatility since inception.
We expect further volatility in the sovereign bond and equity markets as economic data from Europe and US alternate between promising and disappointing, and the opinions on the timing for the rise of rates in the US multiply. Short duration high yield strategies have performed well in the face of the rate volatility seen over the last few weeks, and continue to offer not only fundamental value but also one of the best liquidity premiums around.
As a reminder, the Fund does not hold neither Greek, EM, nor distressed, financial or real estate company assets, and seeks a low volatility, attractive return by investing in liquid bank loans and bonds issued by European corporates which are analyzed and monitored in-house.