Investment insights from Capital Group
Every so often, financial markets undergo a period of turmoil and stress that becomes a high-water mark for measuring volatility over an investment career. The first quarter of 2020 — March, in particular — was one of those periods. The measures taken by governments around the world to slow the spread of the COVID-19 respiratory disease led to a collapse in economic activity, with the impact quickly discounted in financial markets. Long corporate bond spreads widened dramatically in a short span of time, while U.S. Treasury rates declined — although not in a straight line.
The long duration strategy was relatively well positioned upon entering this period of volatility. It was underweight credit risk and held roughly 15% in U.S. Treasuries on a duration-weighted basis. The U.S. Treasury position contributed to positive excess returns and provided a useful source of liquidity as spreads widened and companies came to market with a record level of new issuance. The managers participated in more than 40 new issues in March.
The Capital Group Long Duration Credit Composite fell in absolute terms but outpaced the benchmark Bloomberg Barclays U.S. Long Credit Index. The largest impact on relative results was from sector and industry selection, driven by the position in U.S. Treasury bonds and an overweight to consumer noncyclicals. Issuer selection, which also contributed to excess return, was strongest in banking, where managers participated in many of the new issues during the quarter.
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