Algebris macro fund building “strategic” bets as fiscal support boosts credits

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Algebris Investments is seizing on opportunities in strong, strategically important companies globally that are benefitting from government support during the downturn, as central banks “drop all their taboos” to support the global economy. 

Portfolio manager Alberto Gallo, who runs the Algebris Macro Credit Fund, said that while the market outlook is “bumpy”, there are “very good returns” available in credit markets for patient investors.

Gallo’s strategy - which trades bank debt, sovereigns, and investment grade and high yield corporate debt, has so far advanced 2.68 per cent month-to-date.

Having initially remained cautious throughout January and February, putting more than half of the portfolio in cash, Gallo did not expect the market reaction to the Covid-19 outbreak to be as deep as the 2008 slide.

But speaking on Algebris Investments’ podcast update, he noted how the sharp unwind of heavily levered funds – especially in the hedge fund space – has compounded the sell-off to create value across good quality assets.

“We took advantage of that and we invested the fund up to 70-75 per cent, adding in assets which are solid companies that are strategic and can resist even in a prolonged shutdown,” he explained,  citing telecom companies such as Vodafone and Telefonica, larger systemic banks including Société Générale, Barlcays and ING, and Citigroup in the US, and US industrials such as General Electric.

“We have improved the quality of our portfolio,” he said of recent positioning. While the fund continues to eschew emerging markets (“we see more weaknesses there”), credits are cheap in cyclical industries which will receive continued government support.

“We think this is a good time to enter credit. We also think it is a good time to go into an active strategy which is able to rotate the book to be flexible and to profit from occasional companies or sovereigns who are unable to survive. In our case we have been closing some shorts in March in companies that were hurt a lot,” Gallo said.

“We see a good number of opportunities around the world in strategic firms and banks which will get sovereign support,” he said.

More broadly, Gallo believes central banks have “dropped all of their taboos” with the extensive fiscal stimulus and monetary support packages – but expressed caution over increasing debt-to-GDP ratios and higher inflation further down the line.

“In 2008, the policy response was aimed at Wall Street. It was a financial crisis and central banks bought a lot of assets. We ended up in a decade where asset prices went up but wages remained more or less the same,” he observed.

In contrast, the current downturn – “something that is deeper and shorter in duration – potentially three to six months” – is a real economy crisis, he said.

“We have a very strong response aimed at the real economy, individuals and small businesses, which should reduce the permanent loss of output in the economic fallout from the crisis,” he noted.

Algebris Investments was launched in 2006 by founder and CEO Davide Serra, an Italian-born former UBS and Morgan Stanley analyst, and focuses on a range of credit, equity and non-performing loan markets.