Faced with low-to-negative yields at home, the US investment grade corporate bond market represents an attractive long-term opportunity for many European investors. With abundant liquidity in the market, US exposure provides both diversification benefits as well as the attraction of higher yields, even after hedging costs, without taking on the risk levels associated with investing in sub-investment grade bonds.
However, investors should maintain a prudent, risk-aware approach in the current market. The potential implementation of President Trump’s intended policies give cause for optimism, but much of the positivity is already priced in. Investors should also consider the implications of higher rates, relatively tight spreads as well as the risks to global markets. This is why we believe it is as important as ever to own bond funds that can take advantage of higher yields and maintain a low correlation to equity to provide protection from market shocks. In our view, Capital Group US Corporate Bond Fund (LUX), which was made available to European investors on 21 March 2017, has these attributes. The fund takes a bottom-up approach through fundamental research. It seeks to provide, over the long term, a high level of total return consistent with capital preservation and prudent risk management by primarily investing in US dollar-denominated corporate investment grade bonds.
A BOND FUND THAT ACTS LIKE A BOND FUND
We believe that bond funds should behave as bond investors expect. Capital Group US Corporate Bond Fund (LUX) is exclusively investment grade – with no ‘scope creep’ into sub-investment grade securities to boost yield or short-term returns. The fund has the ability to invest up to 20% in non-corporate credit, but this is 100% dollar-denominated and all investment grade. Every investment decision is ultimately judged by whether the investor is adequately compensated for the risk taken.
MAKING MARKETS EFFICIENT THROUGH RESEARCH
We believe that markets only become very efficient when many people are analysing them. Given the global nature of business, especially for the large corporations that make up the corporate bond universe, in-depth research is integral to investing in the asset class, which is under-researched compared with equities. That’s why Capital Group’s research driven approach may have an advantage. We have a team of experienced analysts who are focused on knowing the industries and companies, their businesses and capital structures.
While many bond managers will encourage their analysts to focus only on riskier fixed-income markets, our research also covers the higher credit-quality markets such as investment grade bonds.
The size and scale of our global research network gives us significant insight into potential opportunities in this market. In fact, we currently manage more than US$260 billion in fixed income assets globally, including over $50.1bn of US investment-grade corporate bonds. In addition to fundamental credit research, we also utilise top-down macroeconomic sector-level perspectives, which directly affect our view on US interest rates and can influence the quality profile of the portfolio. Beyond just thinking about the company in which we’re investing, we take other elements into account in the security selection process to determine a bond’s total return.
If we see increases in economic growth and yields at the global level, the US investment-grade corporate bond market could benefit in terms of improving fundamentals and the potential for attractive returns. Through its disciplined focus on both risk and return, Capital Group US Corporate Bond Fund (LUX) could offer investors added diversification and be used as a durable portfolio building block. To find out more about Capital Group US Corporate Bond Fund (LUX), please visit thecapitalgroup.com/europe.
David Lee is a portfolio manager at Capital Group