Danish credit manager starts a hiring spree: "Banks come to us because they can't recommend their bond funds to their clients"

Inside Copenhagen’s main soccer stadium lies one of Europe’s biggest credit funds.

For Sandro Naef, the chief executive of Capital Four Management, the goal is to increase headcount substantially -- by 25 percent -- to keep up with client demand.

With about USD 15bn in fixed-income assets to oversee, Naef belongs to an industry of money managers that’s fielding increasingly desperate calls for strategies to cope with negative interest rates.

“Clearly, in the current interest-rate environment many, many investors are challenged,” Naef said in a phone interview. In Denmark, where rates have been below zero longer than anywhere else, Naef says he and his portfolio managers “have banks coming to us because they can’t recommend their bond funds to their clients, because they expect negative returns.”

Over the past half decade, Capital Four has more than doubled its assets under management. That’s as debt investors balk at a European government-bond market that largely trades at negative yields. For pension funds, the rate environment has resulted in binge buying of riskier assets as they struggle to generate enough returns to cover their growing liabilities.

Against that backdrop, the corporate debt market turned into a popular destination for investors who’d once deemed it too risky.

“There are clear trends emerging,” Naef said. “One trend is that pension funds want to have more money allocated to alternative assets. In credit, that means high yield, leveraged loans, private debt, CLOs [collatoralized loan obligations] and all these types of instruments.”

Demand has been so intense that Capital Four has had to stop accepting new money for its Credit Opportunities hedge fund, including from existing investors. Instead, it’s planning to respond to inflows with new vehicles, such as its Total Return Credit Fund, which started up last year.

Naef says the best-performing credit asset last year was plain-vanilla high yield debt. Capital Four manages the Nordea European High Yield Bond Fund, which rose 11 percent in 2019.

But the market looks like it’s about to shift gears. “We’re at the end of the credit cycle,” Naef said. “You don’t want to be very exposed to cyclical companies, chemicals or capex-dependent companies that would be hit hard if GDP declines. You want to own areas with more stability, health care and services companies.”

The manager has started branching out, raising EUR 375m in its first collateralized loan obligation with Goldman Sachs last year. The plan is to raise as much as EUR 4bn in CLOs over seven years, and become more active in Asia and in the U.S. Naef says the CLO market is ripe for improvement.

“The part that has done worse is CLO liabilities -- structured credit,” he said. “So it makes sense to own structured credit.”

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