Karen Watkin
Welcome to AB's Alpha Females, the Multi Asset Investment Podcast from AllianceBernstein. I'm Karen Watkin and I'm a fund manager in the Multi Asset Solutions team here at AB. The Alpha Females are those women who have developed unique areas of expertise and made their mark in the investment industry. For many clients, generating income from their investments is a priority. But market conditions are very different now from those that we've had over the past decade. So, taking a flexible approach to income and getting original and informed perspectives to investing is more important than ever. In this series, my guests, the Alpha Females share their expert insights on the key questions for investors on the hunt for income. They'll also be telling me about their career journeys, the challenges they faced and the lessons they've learned along the way. Getting the best income possible is the North Star for many investors, but risk is the cloud that can obscure returns. This is where investment grade or IG credit comes in as it offers investors an attractive but generally safe source of income. But it's a complicated marketplace with hundreds of companies and thousands of bonds to choose between, all of which can offer a high-quality source of income. Yet even high-quality companies can face challenges, whether from a bumpy macroeconomic backdrop, shifting investor demands or changes to trade policy. So how can you find value where everyone is looking for the same thing in a tight and highly scrutinized marketplace? How can you spot when safe investments start turning risky and where new opportunities exist amid such a vast array of companies operating across different sectors? The answer to those questions lies with Souheir Asba, who's a portfolio manager for Investment Grade Credit in Europe. Souheir's job is to understand the nuances within investment grade bonds and spot both problems and possibilities before others. She arrived at her latest position at AB following experience of other areas in the investment universe, having previously worked as both an economist and high yield credit strategist before focusing on ignorance. In addition, Souheir has followed an unconventional path to finance that began with a fascination in gaming in her native Morocco, leading to studies in geospatial engineering and then an MBA. I can't wait to hear more about that. Souheir, thank you so much for joining me today.
Souheir Asba
Thank you for having me.
Karen Watkin
So, let's start with the basics. Can you explain for me what is the difference between investment grade and other types of bonds like high yield for example?
Souheir Asba
I'll start by zooming in onto what asset class are we dealing with here? So, you've got the broad fixed income environment which is basically the lending market. You lend to different entities. You can lend to government, you can lend to corporates. Here we're focusing more on the corporate side. And within that corporate side there is the high-quality investment grade that we're talking about. And then high yield, which tends to be lower quality. We were talking about the quality. We're looking more at the leverage, which is how in depth of the company is versus how much earnings they generate on a yearly quarterly basis. So, there is a delimitation between the two investment universe when it comes to the quality. And obviously that quality or that increased level of risk comes up with more return or more yield on the high yield side. Whereas in the investment grade universe you have lower level of spread, lower level of yield. But also, that's a re this, the, that's a consequence of the level of risk that you're taken by lending to that corporate, either by because of their size or because of the low level of RE leverage, because of diversifications, et cetera, et cetera. Like in practise, the two universes are delimited by the rate and agencies. So, what we call investment grade is anything AAA all the way down to BBB minus and then anything double B plus and below would be called a high yield universe. So, these are the main two differences in how we make the clear demarcation between IG and high yield.
Karen Watkin
And why do you think it's important for income investors to have some of that anchor to quality in their portfolios? What does it bring them that perhaps some of those other areas of the fixed income markets might not?
Souheir Asba
I think it's hard to ignore IG nowadays in the broader fixed income environment because it's quite a large market. It is a market that has grown a lot over the last decade, but also, it's a market that has grown in diversification. A lot of new sectors have grown in size quite a lot. And then the other very important development that happened is that investment grade now is quite a decent source of income and yield. That wasn't necessarily the case before. As an investor, I look at that asset that has a very nice yield with a lower level of risk. So, into any portfolios I would want to have that yield that has lower risk because in environments where we could see potentially a recession or more volatility happening in, it's nice to have that anchor of yield that is less volatile than potentially some other markets like high yield or maybe equity.
Karen Watkin
And you mentioned that that economic backdrop was a big function of why you've seen so much growth in the investment grade. Space. And you know, I spoke with Sandra, our economist in the first episode of this series and she was explaining that shift that we saw, like you said, in terms of particularly the shift that we've had in terms of monetary policy over the last few years. So, given we're potentially going to find ourselves now in a somewhat different economic regime and a potentially kind of higher for longer interest rate environment, what does that mean for investment grade credit?
Souheir Asba
I think that that mainly means that it is more difficult to see that same growth of the overall market happening again because now it is more expensive to borrow. I do think that now CFOs and companies think twice before doing acquisitions that tend to be debt funded. The other aspect of it, I think that change again has meant that the investors that were before not necessarily looking at investment grade credit as a way to reach their income targets, they're now definitely considering it. So, we're seeing demand and supply kind of meaning a very positive technical and quite a nice tailwind for credit, investment credit in particular. And if you look at the flow, meaning how much money has been coming to investment grade credit, the numbers are very positive and showing that there's quite a lot of demand that has been happening in there. And then the other part of it is we're seeing the micro environment being quite challenging. It usually means that corporates will act in a more prudent manner when it comes to their expansion plans, when it comes to their spending. That increased level of uncertainty on the earnings I think makes it harder for companies to go all in or all of these developments and all of that spending beforehand.
Karen Watkin
And you mentioned the growth that you've seen in this space and a lot of companies coming to market to take advantage of low financing rates. How have you seen that change, perhaps the character of the investment grade universe, have you seen different types of companies coming to market?
Souheir Asba
We've seen cycles happening on a sector basis. For example, we've had almost a decade where we've seen the growth of the automotive debt because they needed to fund quite a lot of R and D because of the transition to ev. We're seeing right now in the US and also to another extent in Europe, quite a lot of expansion of utilities debt because of the investment that needs to happen on the grid. So, there is that cycle of investment that happens that tends to be specific to certain sectors. Then we've also seen developments in the curve. The best way to think about the curve is for how long are you happy to lend to the corporate? You can lend on a five-year basis, 10 year, 20 year, 30 year. In the European market, for example, we didn't really have long end lending in the corporate IG market. And then over the last 10 years probably we started seeing bonds that get issued with a maturity of 20 year, 30 years. So, we're seeing that kind of growth of the market and those changes happening on the sector side which make the market more interesting for us.
Karen Watkin
How do you go about navigating all of that and how do you think about finding value in such a kind of broad market that you're operating in?
Souheir Asba
So, the holy trinity for IG credit is the three pillars that we always have to evaluate it's valuation, fundamentals, technicals. So, the first set for us is the fundamentals understanding the fundamental picture from like a macro perspective, what's happening on the economy, what's happening to the consumer, what's happening from a regulation perspective and then from the bottom up, what are the corporates actually doing? Is there more appetite for companies to do certain actions to do more acquis mergers? So, once we have these two, we kind of build the fundamental pictures. The technical is demand and supply. Where's the demand coming from? How big is that demand? What is the incremental buyer for credit? So, for example, for European investment grade, we had at some point the European Central bank that was a buyer for credit and quite a significant one. That balance between demand and supply is how we assess whether the technical is positive or negative, where it's a tailwind or a headwind and then it boils down to valuations. What are the valuations telling us? And in valuations and credit we look at yield, of course, but we also look at spread, which is our measure of the risk. Do we think that we're being fairly compensated for the risk that we are taking?
Karen Watkin
What are the big risks that investment grade investors need to think about?
Souheir Asba
Usually, the main focus for any investment grade portfolio manager is the fundamental deterioration of the balance sheet. So, what is the company likely to do to either protect, improve or in some instances deteriorate and damage their balance sheet and all of these leverage metrics. So, I mentioned earlier talked about the difference between IG and high yield. The risk for us is when a company moves from IG to high yield. So, it kind of like drops into that world of higher risk. The macro aspect is also something where we focus quite a lot and in some instances it can really be directly impactful for credit. We need to be very aware of them and we need to understand how they're going to move the valuations and move our ability to generate positive total and excess returns.
Karen Watkin
So when you're perhaps seeing some of those more macro risks building. So, for example, if you're starting to see signs of potentially moving to a more kind of recessionary type environment, are there particular parts of the market or sectors that you would look to lean into to be kind of more protective through that part of the cycle?
Souheir Asba
Yes. So usually, one of the ways we would look at the credit market, the IG credit market is by cyclicality. So, we kind of divide the universe into cyclicals and defensives. Your defensive sectors would be, for example your utilities, your telecommunication, your pharmaceuticals. The reasoning behind it is if there is a recession tomorrow, I still need to pay my water bill, I still need to pay my electricity bill, I still need to get my medication, I'm a somatic, so I still need to get my inhaler, otherwise I won't be able to talk this long. So yeah, these are defensive sectors that are less sensitive to how well the economy is doing, how well the households are doing. And then you have your cyclical sectors, for example retail. So how comfortable do I feel going on a shopping spree and buying that really nice car between these two, if I think that the economy is frail and that they are non-zero risk of recession that are potentially increasing, then I would position my portfolio onto those defensive sectors because I know that, that the impact of a recession would be less on these sectors versus what it would be on some more of sectors that are sensitive to discretionary spending.
Karen Watkin
So, sectors is clearly one way that you can kind of build more of that defence into the portfolio where you're perhaps seeing risks building. Again, given this is perhaps the part of the portfolio where investors don't want any nasty surprises, how else do you think about kind of managing that risk or kind of building more safety into your portfolio? Are there other tools that you look to use?
Souheir Asba
Yeah, you could go up in quality. The higher the quality, the more headroom you have before you start running into the risk of going into high yield and the risk of having your balance sheet damage increasing quite significantly your borrowing costs. So going traders are going up in quality as we call it. So, you move from your low BBBs or low-quality triple Bs higher into probably your triple B plus your single A's. I would also add that the other important thing to consider when we're looking at investment grade is what is the underlying assumption onto what might the central banks do? So, if there is potential for the central banks to cut Rates because the economy is not doing very well, that's actually quite positive because that means that your risk free rate portion of your overall yield will generate a decent amount of return. And for us, that's also quite a good thing to have in our portfolios.
Karen Watkin
So Souheir, given you've got these thousands of bonds to choose between when you're investing, what's the information you're looking for to try and philtre through all of that and find where those opportunities lie?
Souheir Asba
If I see a headline that that could be related to, let's say a country, a sector, my immediate thinking would be how does that impact these companies? How does that impact these sectors? Is there a link? So, a lot of what we do is about connecting the dots. I think that being able to just take information and dissect it, whether it matters or not, to your sectors, your names, your overall risk level, there's almost always something that you could exclude, dragged and always, almost always impacts. So yeah, I'm always there just like pinging my analyst just with like random headlines saying hey, does this matter for X, Y and Z? And I'm saying go get some sleep.
Karen Watkin
So, I mentioned in the introduction that you've done a few different things before you came to ig. How would you say some of those other roles that you had earlier in your career have informed your approach to investment?
Souheir Asba
Now I would say that my work as an economist and it was a brief gig, I have to say a year and a half, made me more sensitive to understanding the functioning of an economy overall, how different things are interlinked, the difference between some of the hard data and the soft indicative data. My role as a strategist built my ability to look at different factors, your valuations, your technicals and just build them through. Oh, this is the direction of travel for risk. So yeah, it kind of give me a little bit of a rounded-up experience. And obviously when I started as a portfolio manager ages ago, this is when I started building the bottom-up knowledge of saying, okay, how do I look at balance sheet? What do I need to look at? What are the KPIs are important for companies. How do these businesses function? What's important for me to keep in mind when I'm considering this or that sector. So, these, these two elements, top down and bottom up, I think I worked on them throughout different periods of my career.
Karen Watkin
And before you even came to finance, I mentioned you started life as an engineer. So, what, what took you on that path and what brought you over to finance?
Souheir Asba
Oh, I grew up in Morocco and in Morocco, there's basically three viable career paths. You're either in. I mean, at least from my parents, I was either going to be an engineer, a doctor or a. I avoided being a lawyer because my dad works in the sector and I didn't want to have to deal with my dad. I love my dad. I didn't want to have to deal with him. So, it was either being a doctor or an engineer. Doctor sounded too long, so I said, okay, engineering. And I love video games. I used to game a lot. I still game now, but a lot less. And there was this one video game where they had like this navigation system and I was like, oh, this is really cool. I wish I could build that in the future. So yeah, I went into engineering. I really enjoyed it. I think it kind of helped me build a good sequential way of thinking. Engineers are problem solvers at heart. So, the problem that I'm trying to solve now as a portfolio manager is how do I generate my alpha and break it down into pieces. And I think that kind of helped me take in a different approach, I would say, into portfolio management.
Karen Watkin
You've done so many different things before you got here and it seems to me, you're quite a risk taker in that regard. So, I'm interested why investment grade, which is our safest part of the fixed income market, appeals to you? I would have thought maybe you would have liked to have been in something like high yield or emerging markets investment.
Souheir Asba
Grade credit, because it is so large, it offers quite a lot of opportunity. And if you tell me today that so here you could start a business, I would probably start my business in something very boring, but that always generates cash. I'll do something like waste management or I'll be like fixing roofs or something like that. Like, oh, okay. Everybody thinks that it's not really a sexy business. No one wants to go to it. Everybody wants to do, I don't know, coding or wants to be like a life coach. So, I'm going to leave that because it seems overly saturated. I'm going to go somewhere where it's less saturated with the opportunity is huge and the market is massive. For me, that's IG. And once you dig into it, IG is very far from being boring. For me, the ability to take risk isn't dampened by the fact that these companies are investment grade. If anything, it kind of helps knowing that there's a large headroom for you to get to that really negative downside of a default because the market has grown so much. There's so many ways for us to generate alpha and, and investment grade. And there are inefficiencies that still exist in the market that are there to.
Karen Watkin
Explore before we wrap up. What would you say are your three key investment insights for investors looking at investment grade credit?
Souheir Asba
I would say dispersion is increasing, which I mean volatility is increasing. Volatility is good. The more volatile the market, the bigger is our ability to actually generate return and beat the market, generally speaking. So this is the market environment that we should be thriving in versus a market environment where the central banks are completely dampening risk and nothing is moving. Fundamental analysis is very, very important. Being able to have that deep fundamental analysis and put it in the portfolio needs to be like a big focus for any investment grade person, be it an analyst or PM or just an investor looking to invest in investment grade. And then lastly, I do think that the market's inefficiencies are for us to explore through systematic strategies being one. But also this is a market where you can use all of these new generation tools like AI, like all of these quantitative analysis and tools, etc. Quite nicely. I think having the technological edge to do it helps a lot and we want to be able to use all of that technology to be able to take advantage of all of these inefficiencies.
Karen Watkin
They're really great insights. Thank you so much for sharing them and thank you so much for your time today. I've really enjoyed our conversation.
Souheir Asba
Pleasure. Thank you very much for having me. This is very enjoyable for me too.
Karen Watkin
Well, I think the first thing I can take away from that conversation is that investment grade credit is certainly not a boring part of the markets to invest in. And I think Souheir showed that it's really about being able to take both that big picture view of the markets to understand what the economy is doing, what central banks are doing, how that's going to impact the bonds she's investing in, but also then having that real breadth of perspective across all the different companies that she's looking at and really being able to understand from that bottom up fundamental perspective of what state each corporate is in and what they're doing with their balance sheets. And I think as we heard, she brings so much value to that type of role because of the breadth of her experience. She's been an economist, she has worked looking at high yield bonds as a strategist, but even before that as an engineer, you know, she said it's really about being a problem solver, and I think that's exactly what she does in her role as PM for Investment Grade Credit. It's really that ability to think differently and bring that different perspective that she has to things that enables her to find that value in a market like Investment Grade Credit. And that brings to an end this edition of AB's Alpha Females the Investment Podcast with me, Karen Watkin. If you've enjoyed this episode, don't forget to tell your colleagues and friends about it. It only remains for me to thank Souheir. This episode was produced by Richard Myron from Earshot Strategies.
