We have experienced an extraordinary year so far. How did GHIO navigate the volatility and what have you done in the portfolio since then? 

Going into the period of volatility experienced earlier this year, the portfolio was positioned relatively defensively based on a view that valuations looked stretched across the broad fixed income opportunity set, and particularly within high yield. The overall risk profile of the portfolio was towards the lower end of its typical range, and we had also built up a cash buffer with higher levels of cash than normal. While the portfolio was defensively positioned, it is not an absolute return strategy and therefore suffered losses along with the broad-based sell-off across risk markets. 

The COVID-19 shock did, however, provide us with ample opportunity to add to positions at relatively attractive valuations. One of our core strengths at Capital Group, and where we add value, is in our credit research, which enables us to identify the best opportunities out there. We were able to leverage the deep knowledge of our experienced and large research team to take advantage of price dislocations created by the period of volatility. Within high yield, we also made the most of a large calendar of new issuance that came to market at attractive valuations, especially as we had the liquidity to do so. 

In addition, we believe that a key to our success in achieving better long-term outcomes is having a larger investment universe rather than operating in silos. GHIO is focused on the higher yielding sectors of the fixed income asset class, primarily in high-yield corporates and emerging markets debt both in hard currency and local currency. Investing across both corporate high yield and emerging markets provides us with an expanded opportunity set, yet these markets share common characteristics – for instance, they tend to be cyclical, higher beta and selecting the right issue within the capital structure is very important. Having the right tool kit ensures that we can move across boundaries and potentially find the best opportunities in the current market environment. 

Within emerging markets, dollar credit saw a massive repricing and became significantly cheaper than local currency, probably as a result of ETF (exchange-traded funds) activity. The velocity and the magnitude of the sell-off in the high yield market was also quite remarkable with increasing differentiation among sectors. Using the resources of the credit research team, David Daigle, who manages the high yield portion of the portfolio, and I selectively picked our opportunities and made some significant changes to the portfolio. We raised our dollar duration times spread (DTS), restructured our sector exposure within high yield and pivoted towards higher yielding, lower rated securities. 

Markets have recovered a significant portion of their losses since the height of the crisis and there also remains a lot of uncertainty. We have therefore become more defensive again, having reduced the DTS in hard-currency assets and the dollar duration. We still have strong issuer credit convictions, but the overall risk profile has come down quite a bit. Should volatility pick up and assets reprice again, we would likely become more active. At the moment, we are very much guided by valuations and central bank policy.