Max Matthiessen: Majoring on High Quality and Investment Grade Credit

By Hamlin Lovell, NordicInvestor

Max Matthiessen, founded in 1889, is one of the leading financial advisors within pensions and wealth management in the Nordic region. The product offering includes occupational pensions, asset management and non-life insurance and the assets under management amounts to approx. 50 billion SEK. NordicInvestor interviewed Jon Arnell, Head of Investments, who has responsibility for investment strategy and discretionary mandates, which allocate to external managers.

By how much did the Coronavirus Pandemic change your macro view and asset allocation to equities and credit?

Naturally the macro outlook changed quite dramatically, and the development led to changes. Going into the pandemic we were overweight equities on the back of what seemed to be a pickup in the economic activity. We had started to question our positive view from an asset allocation standpoint as the year started on the overly optimistic side, but nothing we had taken any action on. When the markets started to fall, we had to reassess our view focusing on the longer term and hence maintained a constructive approach. We increased our exposure to equities in March and April mainly through global strategies with focus on quality growth.

We participated in much of the recovery until late May and has since then taken a more neutral stance which in hindsight was a bit early. A lot has been discounted for in terms of a recovery in anticipation of a vaccine this side of the year. But then again, it’s all about liquidity so we have to follow the central banks closely.

What is your macro outlook and how does this guide your asset allocation?

Generally, we do not make any forecasts but rather try to adapt to the current environment, interpret the consensus view and pay extra attention to sentiment. It’s all about expectations and our job is to try to understand where that will lead the markets. The jury is still out on the recovery although one could say the V-shape is very much happening given the recent snap back. We believe there’s still uncertainty whether the recovery is trustworthy and is probably not a stable one without a vaccine, which means it will take a little longer. Low growth and depressed interest rates are most likely here to stay for some time, which will continue to feed already established trends where growth stocks and the hunt for yield have the upper hand. At the same time stock selection will grow in importance as the recovery lingers on and government aid fades.   

What is your default outlook for corporate and emerging market debt at the broad asset class level? Which sub-sectors of credit are you overweight of and underweight of?

The central banks are pretty clear in that interest rates will stay low for some time and that the asset purchase programs will continue, which means investors will keep bidding for corporate bonds. 

Given the environment the last couple of years, investors have been pushed into riskier assets within the fixed income markets. Sometimes without being aware of it, which was pretty evident during the spring in the Nordics. It’s important to keep an eye on style drifting and remain highly selective. We still favour credit on a more high-quality basis but in a downturn,  credit tends to follow equities, so you need to diversify and keep an open mind although interest rates are historically low. 

In particular, have Fed purchases of high yield debt been a “game changer”? How much value is left in US high yield offering a record low yield of 3%?

We don’t have a view on the potential value left as we don’t do US high yield out right, but of course it was a “game changer” when Fed introduced the asset class within its purchase mandate. It gave a strong boost to sentiment and acts as a psychological tailwind going forward. Lower for longer still holds, even more so now given the stimulus and the hunt for yield will continue. High yield offers interesting returns but on a more selective basis given the economic development.   

Would ECB purchases of speculative grade corporate debt also be transformational?

Yes, like in terms of the Fed it would provide a sense of “we have your back” and put a steady bid in the market. When the ECB started buying assets in conjunction with the GFC there was a clear positive effect and boost to sentiment back then and there’s reason to believe that will be the case once again.

Security Selection

Do you expect central bank purchases will increase pricing inefficiencies?

Yes, in the sense that it floats all boats. More intervention could lead to capital misallocation and increased inefficiencies. Quality is sort of out in favor of quantity, but in the longer term it’s all about quality. Credit selection and quality besides liquidity continue to be utterly important.     

In corporate credit, are your managers focused more on companies with resilient revenues, or are you also looking at deep value, stressed and distressed recovery stories in the hardest hit sectors such as oil, airlines, hotels, restaurants?

I would say we’re more quality focused leaving the distressed stories for others to invest in, but with that said we could definitely look at it from time to time.

But we’re are not actively seeking that type of exposure out right. 

Before Covid 19, did your managers’ credit analysts ever stress test for a company’s revenues dropping to zero? Do you have any exposure to firms that are temporarily in this situation?

I can’t recollect that I’ve seen stress tests elaborating with these complete shutdowns that we’ve experienced and the consequences following that. I don’t think anyone had really expected revenue drops in the magnitude of 90 percent. It’s historical figures and extraordinary times. Sure, we have some names that have faced major problems where measures have been taken where we’ve only seen partial recovery to date. But that is also why you have to spread your risks and keep working with the assets.    

Cash and liquidity

Has liquidity got better or worse in any or all of the sectors your managers trade, during 2020?

In the Nordic markets we saw a complete stand still in terms of liquidity or perhaps more of a one directional trade during the spring. Large outflows in a couple of funds affected the whole market in terms of valuation and the fact that you couldn’t trust the quoted spreads. Illiquidity has been the name of the game in the Nordic markets or at least in parts of the market for a long time, but that is also something you hopefully get paid for. This is nothing new and we have always highlighted this to our clients as a major risk. This time it also comes down to knowing what you have invested in and the notion of style drifting given the low rate environment.

Will central bank purchases improve liquidity by providing a regular bid, or reduce liquidity if central banks buy and hold rather than trading assets?

You have a natural buyer in the market which in some sense improves the liquidity although the free float might diminish.  It’s hard to say if the liquidity improves or not.

Are you holding some cash either for “dry powder” to take advantage of any further sell-offs?

We are allocating between asset classes and cash is only a residual and pure liquidity buffer, but we do take advantage of opportunities in terms of reallocating within our portfolios.