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BK Investment Grade 8
Quarterly Report | 31st December 2023
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The final NAV of the BK Investment Grade 8 (USD / EURO) as of 31 December 2023 is:
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| USD Class |
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EURO Class |
104.68%
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103.11%
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Monthly Return*: +1.9%
Return* since inception: +4.7%
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Return* since inception: +3.1%
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Fund and Market Performances as of 31st December 2023
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USD
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EUR
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Monthly Performances
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USD Performances
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EUR Performances
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Fund's Statistics
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| Industry |
% of Portfolio |
| Software |
7.7% |
| Teleco Services |
7.0% |
| Chemicals |
6.1% |
| Health Care |
5.5% |
| Media |
5.1% |
| Hotels & Restaurants |
4.7% |
| Building Products |
4.0% |
| Commercial Services & Supplies |
3.6% |
| Diversified Consumer Services |
3.3% |
| Professional Services |
3.1% |
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| Issuer |
% of Portfolio |
| Altice Europe |
1.5% |
| Ineos Ltd |
1.4% |
| Liberty Global |
1.3% |
| Virgin Media O2 UK |
0.8% |
| WS Audiology |
0.6% |
| Asurion Group |
0.5% |
| Lorca Jvco Ltd |
0.5% |
| G4S |
0.5% |
| Nidda Group German |
0.4% |
| Altice USA |
0.4% |
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Market Commentary & Portfolio Overview
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On both sides of the Atlantic, dramatic central banks made disruptive comments. Treasury Secretary Janet Yellen made an unusual declaration on January 5th: “What we’re seeing now I think we can describe as a soft landing, and my hope is that it will continue.” Speaking last week in Davos, ECB President Christine Lagarde, when asked about a summer rate cut, Lagarde described the prospect as “likely.” While a warning of the high uncertainty followed her comment, this has been interpreted as a clear indication of intent, marking a sharp change of message as European Central Bank officials have been wary of even discussing interest-rate cuts until now.
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The Economy: Firm Economies
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In December 2023, US inflation rebounded to 3.4% from November's 3.1%, driven by moderated price hikes in food, shelter, and medical care. While December payrolls exceeded expectations at 216,000, revisions reduced previous gains by 71,000. Despite a steady unemployment rate of 3.7%, job gains in sectors like education/health and leisure/hospitality signal a healthy economy with a Q3 2023 GDP growth of 4.9%. Yellen remains optimistic, acknowledging inflation's non-linear path. Speculations abound on the 2024 interest rate cut, contingent on the Fed's confidence in inflation control.
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In the Eurozone, December's consumer inflation rose to 2.9%, rebounding from November's 2.4%. This increase, driven by a significant rebound in German energy inflation, contrasts with a 0.1% GDP contraction in Q3 2023, the first since Q4 2022. The unemployment rate remained stable at 6.5%. Despite economic contraction, the European economy shows stability without immediate expected downsides. Inflation nearing the ECB's 2% target supports Lagarde's stance on maintaining the current interest rate.
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Corporate Markets: Resilient US and Gain Potential in Europe
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In Q3 2023, 80% of S&P 500 companies exceeded earnings per share (EPS) estimates, led by Information Technology at 89% and Consumer Discretionary at 87%. Real Estate was the lowest performer at 52%, signaling a decline from the previous quarter. The trend of firms surpassing estimates indicates the U.S. market's resilience and lower volatility, which are expected to continue in 2024 with decreasing interest rates and ongoing investments in advanced technologies like generative AI.
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In the Eurozone, the STOXX Europe 600 Index was up 12.74% for 2023. Anticipated interest rate cuts are currently lifting European stocks. There is a potential market downturn risk if optimism wanes. Despite the unfavorable macroeconomic outlook, European stocks are comparatively undervalued historically and internationally, indicating the possibility of share price gains in 2024.
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Corporate Loans: Improvements and Challenges
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In Q3 2023, the U.S. syndicated leveraged loan market showed substantial growth, with total volume increasing by 27% from Q2 2023 and 30% from Q3 2022. The surge was primarily driven by a remarkable 52% increase in institutional term loan volume, reaching $76.4 billion in Q3 2023—a 261% surge from Q3 2022. In contrast, total pro rata loan volume decreased to $24.2 billion in Q3 2023, down 18% from Q2 2023 and 57% from Q3 2022. In Q3 2023, the default rate for U.S. leveraged loans declined. The Morningstar LSTA US Leveraged Loan Index reported a 1.27% default rate by amount and 1.67% by issuer count for the LTM period ending September 30, 2023, compared to 1.71% by amount and 1.86% by issuer count for the LTM period ending June 30, 2023. These rates were below the 10-year average default rate by amount.
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In the Eurozone Q3 2023, total volumes of €15,057m marked a 29.8% decrease from Q2 2023 (€21,231m) and an 18.73% decline from Q3 2022 (€18,527m). Leveraged loan trades in Western Europe accounted for 82.66%, a decrease from the previous quarter but an increase from Q3 2022. The European loan market concluded 2023 on a strong note, with the Morningstar European Leveraged Loan Index (ELLI) returning 1.21% in December, driven by robust CLO demand and improved market sentiment. The ELLI's average bid price increased by 42 basis points to close at 96.02. Despite posting a full-year return of -13.42%, the ELLI emerged as the best-performing asset class in Europe for the year. Single-Bs outperformed other rating cohorts both monthly and yearly. Opportunistic deals drove primary market supply, with total institutional volume decreasing to €1.6 billion.
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CLO Market: Resilience and Consolidation
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In Q3 2023, US CLO debt tranches showed strong returns driven by increased carry and rising prices, marking another robust quarter for the CLO market. Successful LIBOR to SOFR transition, tighter spreads, and $29 billion in new issuances were key highlights. As base rates rise, the all-in coupon remains compelling, with attractive yields compared to other fixed-income classes. While loan default and rating downgrade activities slowed, overall credit metrics weakened slightly. The challenging arbitrage environment led to lower issuance, creative deal structures, and the notable absence of large managers. The top 20 CLO managers experienced a 50% decline in issuance, and potential consolidation among US CLO managers continues with at least six managers selling or acquiring YTD.
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In the Eurozone, the year-end seasonal slowdown contributed to a decrease in CLO issuance, with total volume reaching €0.8 billion for December but remaining resilient at €26.2 billion for the year. The ELLI experienced one default (Wittur), causing the trailing 12-month default rate to increase from 1.42% in November to 1.62%. Senior and junior over-collateralization (OC) test cushions for reinvesting CLOs increased, with senior cushions averaging 9.1% and junior cushions at 4.1%, up from 8.8% and 3.8%, respectively, in the previous quarter.
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BK Investment Grade Fund 8: Performances
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2023 saw the first quarters of BK Investment Grade 8. In our asset selection process, we employ a deep-down analysis of the CLO tranches, their underlying portfolios, and their structure, with an emphasis on the resistance to bear scenarios.
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We have USD (59% of the portfolio) and Euro (41% of the portfolio) CLO tranches (segregated). We are building a diversified pool of CLO tranches with various profiles (style of the CLO manager), vintage, and duration. We have participated in both new issues (26% of our trading) and secondary markets (74%) in the BBB space. The recent tightening allowed us to monetize trading gains. Overall, the portfolio is well-positioned to benefit from market softening while resisting under realistic scenarios.
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The USD portfolio has delivered 14.7% annualized since inception, and the Euro 9.6%, in line with our expectations. We believe the portfolio will continue to deliver strong performance as we maintain our trading discipline and strategy.
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Fund’s Summary
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| Currency |
USD and EUR |
| Fund’s Inception |
June 2023 |
| Distribution |
Quarterly |
| Investment Manager |
Oristan Ireland DAC |
| Administrator |
Apex Funds Services |
| Custodian |
CIBC Bank & Trust |
| Counsel |
Dillon Eustace |
| Auditor |
Deloitte |
| Bloomberg Page |
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BKIG8AU KY (USD KY Feeder)
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BKIG8AE KY (EUR KY Feeder)
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BK8A1US LX (USD LX feeder)
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BK8A1EU LX (EUR LX Feeder)
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Portfolio Manager
Olivier Gozlan
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This is not for distribution to, or use by, any person or entity in any jurisdiction where such distribution or use would be contrary to law or regulation. The information contained herein is for information only and does not constitute an offer regarding any product. The document has been prepared by Oristan Ireland DAC and the data have not been audited nor verified. Past performance cannot indicate future performance. There is no assurance that the investment objective will be achieved and investment results may vary.
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