CQS has rebounded sharply from last year, when several of its funds finished the year with losses. The firm has steered its funds back into positive territory even as its founder has recently grown more cautious about global market conditions.
London-based CQS, which manages about $12 billion, is a multistrategy firm with a strong bent toward various credit strategies. CQS stands for “convertible and quantitative strategies.”
The firm’s $2.6 billion flagship CQS Directional Opportunities Fund surged 4.61 percent in August and is now up 18.29 percent for the year. The fund, which the firm describes as a high-conviction directional fund, lost 8 percent last year. The $500 million CQS Global Convertible Arbitrage Fund gained 0.9 percent in August and 5.1 percent for the year.
The $1 billion CQS ABS [asset-backed securities] Fund moved into positive territory last month, gaining 3.45 percent in August, and is now up 3.31 percent for the year, while the CQS Credit Multi Asset Fund, a long-only credit fund launched in 2013, rose 1 percent last month and is up 5.2 percent for the year. Meanwhile, the $1.3 billion CQS Diversified Fund, which is a fund of CQS funds, jumped 2.64 percent in August and is up 8.3 percent for the year.
CQS founder Michael Hintze expressed in the firm’s August 2016 letter to clients that he is very nervous, at least on a macro level.
“There are uncertainties created by global geopolitical turbulence, rising populism, and political uncertainty in the U.S. ahead of November’s presidential elections,” writes Hintze, who has qualified for Alpha’s Rich List three times.
In Europe, Hintze points to June’s Brexit vote and critical elections slated next year in Germany, France, the Czech Republic, Hungary and Norway, which he asserts “are likely to add to the debate around what kind of Europe EU citizens want.”
In Asia, he notes China’s moderating growth rate and Japan’s disappointing growth rate.
“In contrast, the U.S. economy appears to continue to grow, labor markets are tightening and the Fed is considering a more hawkish monetary policy,” Hintze adds.
Despite these geopolitical and economic uncertainties, Hintze is heartened that global economies still have quantitative easing to drive liquidity.
“With the world’s major economies slowing, central banks globally are likely to err on the side of caution and monetary policies should generally continue to be supportive,” he adds.
Hintze makes it clear that in this environment, he does not like stocks. Officially, he is neutral on the asset class, explaining he does not expect stock prices to rise at the same time he expects earnings to flatten or decline. Rather, he is bullish on other markets.
Hintze especially likes corporate credit. “The current environment lends itself to a multi-asset approach to credit investing, by allowing us to allocate to different parts of the credit spectrum as and when the prices of credit sub-asset classes swing,” he adds.
Hintze likes high-yield bonds, versus investment-grade bonds, of companies based in the U.S. and does not like European high-yield. He acknowledges that the default rate recently hit a six-year high. But he stresses that 75 percent of defaulted debt is coming from the energy and metals and mining sectors.
“Contagion has been fairly limited as a function of a benign macro backdrop and accommodative fiscal policies,” Hintze writes. Specifically, he likes junk bonds with either a B or BB credit rating, primarily with a duration of less than two years, which means the bonds are not very sensitive to interest rate changes.
Elsewhere in the credit markets, Hintze says he likes senior secured loans but prefers those issued by U.S. companies, as European loans have already outperformed over the past two years. He also singles out several markets within the asset-backed securities markets, including certain tranches of the collateralized loan obligation markets in both the U.S. and Europe, such as mezzanine debt — which is sort of a hybrid of debt and equity — and equity.
In Asia, Hintze says he is finding “selective value” in investment-grade subordinated bonds in Japan, especially those issued by well-known companies. In general, however, he stresses he is avoiding almost all investment-grade bonds in Asia and is cautious on most B and BB high-yield bonds in Asia.
Hintze also notes that in the equities market, certain Chinese companies listed in Hong Kong and on the mainland “trade at relatively cheap valuations while showing good earnings growth.”
Finally, Hintze likes the convertibles market. “Valuations have cheapened and I believe they are now attractive,” he writes. He stresses that convertibles are not a crowded space and he is finding value both in arbitrage and long-only strategies.
“We are in an environment where growth globally is slowing, geopolitical events are taking centre stage and where central bank interventions and regulation are creating market anomalies and volatility,” Hintze states. “I am excited about potential investment opportunities this presents to us in credit and other markets.”
