It has been the perfect storm as a manager of a new active fixed income ETF in 2022 as rates rose rapidly over a short period of time, but Capital Group’s Damien McCann is not in bunker mode. Rather the co-manager of the Capital Group Core Plus Income ETF (CGCP) and team are preparing to increase exposure to high yield corporate bonds that are unfairly punished in 2023.
The approximately $360 million multi-sector fixed income ETF launched in late February 2022 and was part of the firm’s first foray into the ETF market. Likely due in part to advisor comfort with the first six products and other active ETFs in 2022, Capital Group added three more active fixed income ETFs in October. At the end of November, Capital Group managed an impressive $5.1 billion of ETF assets, led by the Capital Group Dividend Value ETF (CGDV). Advisor adoption of the new ETFs is a sign of the firm’s strong brand and efforts to provide education on the benefits of active management.
CGCP prioritizes sustainable income and risk mitigation, while supporting capital preservation and diversification. Yet management has discretion to shift exposure to bond sectors as well as within industry groups based on the macroeconomic picture and fundamentals.
McCann, who has 22 years of investment experience and also co-manages active fixed income mutual funds for Capital Group, works with Xavier Gross, David Hoag, and Ritchie Tuazon to run CGCP.
“The inflationary environment is going to continue to put pressure on credit profiles, which is why we are conservatively positioned with overweights to securitized debt and investment-grade corporate bonds and underweights to high yield and emerging markets,” explained McCann. “However, we have found strong credit opportunities in the more resilient industries like cable, insurance brokerage, media, and pharmaceuticals.”
While McCann did not name individual companies, according to Capital Group’s website, Charter Communications and Teva Pharmaceuticals were among the CGCP’s 10 largest issuers at the end of October.
The ETF’s credit breakdown consisted of 55% in AAA-rated bonds or U.S. Treasuries and Agencies, 27% in other investment-grade bonds, and the remainder in speculative-grade rated or unrated securities. The majority of the speculative-grade bonds were BB-rated.
The phrase “junk bonds” that is commonly used to describe the speculative-grade sector suggests the issuers are close to defaulting, but McCann believes that is unfair, as only 12% of the high yield market is CCC-rated. Rather, he explained that the percentage in BB bonds is the highest it has ever been.
One of the benefits of an actively managed ETF is the flexibility to shift exposure when the environment changes.
“We are getting ready to buy issuers with strong free cash flow generation that are unfairly punished in more cyclical sectors. The bottom is only evident in hindsight,” added McCann.