Andrew Kronschnabel, portfolio manager at Logan Circle Partners, is cautious about two sectors: pharmaceuticals and high-grade technology.
“There have been a number of headline risks with respect to certain pharmaceutical names and certain drugs that are being sold,” says Kronschnabel, who manages the Renaissance U.S. Dollar Corporate Bond Fund. “So it’s an area that is a bit of a minefield just recently, and it’s very important to be fundamentally aware of where you’re allocating capital.”
Kronschnabel says big tech names like Microsoft, Oracle, and Apple are concerning because “they have become extraordinarily large issuers of debt in the fixed-income space. While these companies are very high-quality, they’ve traditionally traded at very rich levels because there weren’t a lot of bonds outstanding.” That has changed; they’re now some of the market’s biggest bond issuers.
“They’re trading in a cheaper manner than they used to trade, so that’s another area that we’re being cautious about: that high-quality technology area of the marketplace,” says Kronschnabel.
Kronschnabel found the high-grade market promising during the summer months. As a result, he increased risk in his portfolio.
That larger appetite for risk wasn’t due to market volatility, though, as “the market has been extraordinarily not volatile throughout the course of the summer. What we did see was an increased amount of new issuance from the fixed-income primary market that came at levels we felt were attractive.”
Kronschnabel says in August alone, there was $128 billion in high-grade fixed income new issuance — one of the highest ever recorded for a notoriously slow month. At the same time, he received inflows in his fund, so he says it has higher liquidity than usual.
“Typically in the U.S., after Labour Day, the market reconvenes and activity picks up. So we anticipate redeploying some of that additional liquidity into the market in September as we see opportunities to do so,” he adds.