High Yield: Attractive Compensation for Adding Risk  

As COVID-19 has spread globally, credit markets have experienced severe spread widening in March. While this led to painful short-term losses for High Yield investors, great times may be ahead of those that are able to tap into the market dislocations that currently present itself. Nordea Asset Management has a longstanding partnership with the Global Fixed Income Team at MacKay Shields LLC for the management of its credit oriented strategies, including US High Yield. We would like to share with you here below the latest insights of the investment team and how they are planning to grasp the attractive opportunities that have emerged.

Over the past couple of years, we have been concerned by important imbalances building in the economy. These imbalances suggested to us that the economic expansion which began in 2009 had reached a late stage and was susceptible to shocks. Given this late-cycle assessment and valuations that were generally full, we have continued to gradually reduce risk during the last two years. As a result, high yield portfolios were defensively positioned entering 2020.

The COVID-19 health crisis is the shock which has transitioned the economy to the contraction phase of the cycle as government-mandated policies have put the economy into a recession. Both the monetary and fiscal authorities in the US have responded aggressively to stabilize capital markets and cushion the blow to individuals and businesses resulting from this crisis. Although we recognize that the depth of the current economic contraction as well as the timing and the trajectory of the subsequent recovery remain uncertain, we have started to incrementally add higher quality risk back into our high yield portfolios.

A number of factors have contributed to this decision, but the key drivers originate as always from our top-down and bottom-up framework. From a top-down perspective, in addition to the broad and aggressive response from monetary and fiscal authorities during the past several weeks, the US Federal Reserve announced on April 9th that it would provide direct support to the US high yield market for the first time ever by extending its credit facilities to recent and future fallen angels while also purchasing high yield ETFs. In terms of the bottom-up, valuations for higher quality issuers that should be able to navigate the current environment well have become attractive. Importantly, while valuations in the broader market have reached levels typically associated with a recession or significant dislocation, we do not believe compensation is sufficient yet in many higher risk credits and industries.

As we continue to slowly add risk back into portfolios, our initial focus is on higher quality issuers, including fallen angels that have the benefit of support from the Federal Reserve, where there is attractive compensation for risk. We believe a disciplined approach is especially critical in this unique environment, and therefore we plan to execute within the following framework:

1. Take advantage of opportunistic situations related to forced selling or significant new issue concessions
2. Purchase issuers we previously sold or reduced when valuations became too rich
3. Add high quality credits we did not own due to valuations
4. Move down in the capital structure of issuers we currently own
5. Add selectively to single-B and below credits

Importantly, the ability to add risk back into portfolios at turns in the cycle is a key component of the philosophy and process that has allowed us to successfully navigate multiple market cycles. While we are currently seeking to take advantage of attractive valuations and participate in the upside of the market, we continue as always to remain mindful of providing downside protection.

Fund ISIN
Nordea 1 – US High Yield Bond Fund LU0278531610 (BP-USD) / LU0378611387 (BI-USD)
Nordea 1 – Global High Yield Bond Fund LU0476539324 (BP-USD) / LU0476539084 (BI-USD)
Nordea 1 – Low Duration US High Yield Bond Fund LU0602537069 (BP-USD) / LU0602536509 (BI-USD)
Nordea 1 – US Corporate Bond Fund LU0458979746 (BP-USD) / LU0475887237 (BI-USD)
Nordea 1 – Unconstrained Bond Fund – USD Hedged LU0975281527 (BP-USD) / LU0975281360 (BI-USD)

The sub-funds mentioned are part of Nordea 1, SICAV, an open-ended Luxembourg-based investment company (Société d’Investissement à Capital Variable), validly formed and existing in accordance with the laws of Luxembourg and with European Council Directive 2009/65/EC of 13 July 2009. This document is advertising material and does not disclose all relevant information concerning the presented sub-funds. Any investment decision in the sub-funds should be made on the basis of the current prospectus and the Key Investor Information Document (KIID), which are available, along with the current annual and semi-annual reports, electronically in English and in the local language of the market where the mentioned SICAV is authorised for distribution, without charge upon request from Nordea Investment Funds S.A., 562, rue de Neudorf, P.O. Box 782, L-2017 Luxembourg, from the local representatives or information agents, or from our distributors.Investments in derivative and foreign exchange transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of shares can greatly fluctuate as a result of the sub-fund’s investment policy and cannot be ensured. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. For further details of investment risks associated with these sub-funds, please refer to the relevant Key Investor Information Document (KIID), available as described above. Nordea Investment Funds S.A. has decided to bear the cost for research, i.e. such cost is covered by existing fee arrangements (Management-/Administration-Fee). Nordea Investment Funds S.A. only publishes product-related information and does not make any investment recommendations. Published by Nordea Investment Funds S.A., 562, rue de Neudorf, P.O. Box 782, L-2017 Luxembourg, which is authorized by the Commission de Surveillance du Secteur Financier in Luxembourg. Further information can be obtained from your financial advisor. He/she can advise you independently of Nordea Investment Funds S.A. Please note that all sub funds and share classes might not be available in your country of jurisdiction. Additional information for investors in Switzerland: The Swiss Representative and Paying Agent is BNP Paribas Securities Services, Paris, Succursale de Zurich, Selnaustrasse 16, CH-8002 Zurich, Switzerland. Additional information for investors in Germany: The Information Agent in Germany is Société Générale S.A. Frankfurt Branch, Neue Mainzer Straße 46-50, DE-60311 Frankfurt am Main, Germany. A hard copy of the above-mentioned fund documentation is also available here. Additional information for investors in Austria: The Information and Paying Agent in Austria is Erste Bank der österreichischen Sparkassen AG, Am Belvedere 1, AT-1100 Vienna, Austria. Additional information for investors in the Netherlands: Nordea 1, SICAV is a Luxembourg Undertaking for Collective Investment in Transferable Securities (UCITS) registered in the Netherlands in the register kept by the AFM, and as such is allowed to offer its shares in the Netherlands. The AFM register can be consulted via www.afm.nl/register. Additional information for investors in France: With the authorisation of the AMF the shares of the sub-funds of Nordea 1, SICAV may be distributed in France. Centralising Correspondent in France is CACEIS Bank, located at 1-3, place Valhubert, FR-75206 Paris cedex 13, France. Investors are advised to conduct thorough research before making any investment decision. Additional information for investors in Belgium: The Financial Service Agent in Belgium is BNP Paribas Securities Services S.C.A., Brussels Branch, Rue de Loxum, 25, BE-1000-Brussels, Belgium. A hard copy of the above-mentioned fund documentation is available upon demand free of charge. Additional information for investors in Spain: Nordea 1, SICAV is duly registered in the CNMV official registry of foreign collective investment institutions (entry no. 340) as authorised to be marketed to the public in Spain. The Depositary of the SICAV’s assets is, J.P. Morgan Bank Luxembourg S.A. In Spain, any investment must be made through the authorised distributors and on the basis of the information contained in the mandatory documentation that must be received from the SICAV’s authorised distributor prior to any subscription. The Representative Agent is Allfunds Bank S.A.U., C/ de los Padres Dominicos, 7, ES-28050 Madrid, Spain. A complete list of the authorised distributors is available in the CNMV’s webpage (www.cnmv.es). Additional information for investors in Portugal: The Management Company of the SICAV, Nordea Investment Funds S.A., and the Depositary of the SICAV’s assets, J.P. Morgan Bank Luxembourg S.A., are validly formed and existing in accordance with the laws of Luxembourg and authorized by the Commission de Surveillance du Secteur Financier in Luxembourg. Our distributor in Portugal is BEST – Banco Electrónico de Serviço Total, S.A., duly incorporated under the laws of Portugal and registered with the CMVM as a financial intermediary. Additional information for investors in Italy: Fund documentation as listed above is also available in Italy from the distributors and on the website www.nordea.it. The updated list of distribution agents in Italy, grouped by homogenous category, is available from the distributors themselves or from the Paying Agents: State Street Bank International GmbH – Succursale Italia, BNP Paribas Securities Services – Succursale di Milano, Allfunds Bank S.A.U. Succursale di Milano, Société Générale Securities Services S.p.A., Banca Sella Holding S.p.A, Banca Monte dei Paschi di Siena S.p.A., CACEIS Bank S.A – Succursale Italia and on the website www.nordea.it. Any requests for additional information should be sent to the distributors .Before investing, please read the prospectus and the KIID carefully. We recommend that you read the most recent annual financial statement in order to be better informed about the fund’s investment policy. The prospectus and KIID for the sub-funds have been published with Consob. For the risk profile of the mentioned sub-funds, please refer to the fund prospectus. Additional information for investors in the United Kingdom: The Facilities Agent is Financial Express Limited 2nd Floor, Golden House 30 Great Pulteney Street W1F 9NN, London, United Kingdom. Additional information for investors in Ireland: The Facilities Agent is Maples Fund Services (Ireland) Limited, 32 Molesworth Street, D02 Y512 Dublin 2, Ireland. Additional information for investors in Sweden: The Paying Agent is Nordea Bank Abp, Swedish Branch, Smålandsgatan 17, SE-105 71 Stockholm, Sweden. Additional information for investors in Denmark: The Representative and Sub-Paying Agent is Nordea Bank Abp, Danish Branch, Grønjordsvej 10, DK-2300 Copenhagen S, Denmark. A hard copy of the above-mentioned fund documentation is available here. Additional information for investors in Norway: The Paying Agent is Nordea Bank Abp, Norwegian Branch, Essendrops gate 7, Postboks 1166 Sentrum, NO-0107 Oslo, Norway. The Representative Agent is Nordea Funds Ltd, Norwegian Branch, Essendrops gate 7, Postboks 1166 Sentrum, NO-0107 Oslo, Norway. Additional information for investors in Finland: The Paying Agent is Nordea Bank Abp, Satamaradankatu 5, FI-00020, Helsinki, Finland. The Representative Agent is Nordea Funds Ltd, Satamaradankatu 5, FI-00020, Helsinki, Finland. Additional information for investors in Latvia: The Representative Agent is Luminor Bank AS, 62 Skanstes iela 12, LV-1013 Riga, Latvia. Additional information for investors in Estonia: The Representative Agent in Estonia is Luminor Bank AS, Liivalaia 45, EE-10145 Tallinn, Estonia. Additional information for investors in Lithuania: The Representative Agent in Lithuania is Luminor Bank AB, Konstitucijos pr. 21 A, LT-03601 Vilnius, Lithuania. Shareholders must evaluate possible investment risks and take this into consideration when making investment decisions. Information for investors in Brazil: This is a strictly privileged and confidential document for the purposes of a potential investment in foreign securities on a one-on-one basis with potential investors with a pre-existing relationship with Nordea Investment Funds S.A. This document contains information addressed only to a specific individual and is not intended for distribution to, or use by, any other person. This document (i) is provided for informational purposes only, (ii) should not be construed in any manner as any solicitation or offer to buy or sell any securities or any related financial instruments, (iii) should not be construed in any manner as a public offer of any securities or any related financial instruments, and (iv) and will be addressed to a potential investor with restrict access of information. Nordea 1, SICAV have not been, and will not be, registered with the Brazilian Securities Commission (Comissão de Valores Mobiliários – CVM), and must not be offered or sold in Brazil except in circumstances which do not constitute a public offering or distribution under Brazilian laws and regulations. Any public offering, placement or distribution, as defined under Brazilian laws and regulations, of securities in Brazil, is not legal without prior registration under Law No. 6,385 of December 7, 1976, as amended. Documents relating to the offering of the Nordea 1, SICAV, as well as information contained therein, must not be supplied to the general public in Brazil (as the offering of the Nordea 1, SICAV is not a public offering of securities in Brazil) or used in connection with any offer for subscription or sale of the Nordea 1, SICAV to the general public in Brazil. Investors within Brazil should consult with their own counsel as to the applicability of these laws and regulations or any exemption there from. Source (unless otherwise stated): Nordea Investment Funds S.A.

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