Yields on 10-year US treasury bonds and government bonds in Europe remained high coming into 2025, and continued with 2024’s historically tight spread levels versus corporate credit. Still, some investors appear reluctant to take large directional macro bets as uncertainty around the possibility of policy changes in the US remains high.
In Europe, many investment-grade portfolio managers continue to favor the subordinated bank debt of large established European banks, citing strong balance sheets and decreasing leverage amid stricter regulation since the 2008 great financial crisis. In the US, we are seeing portfolio managers home in on US energy companies, referencing high demand and shielding from possible tariffs. In addition, bond supply is expected to tick-up in 2025, as 5-year vintages come due following the 2020 onset of Covid-19.
We take a closer look at two funds in the Morningstar Category Global Corporate Bond – USD hedged that are qualitatively rated by Morningstar analysts, discussing their similarities and differences: Pimco Global Investment Grade Credit and Invesco Global Investment Grade Corporate Bond.
People
On the Invesco side, Lyndon Man serves as co-head of global investment-grade credit and has led that strategy since August 2013. He is supported by co-manager Michael Booth, who officially joined the management team in January 2024 but has been actively involved since July 2016. Team co-head Luke Greenwood completes the lineup, but his focus remains on passive strategies.
On the Pimco side, Mark Kiesel has run the strategy since its inception in July 2003 and was named global credit CIO in 2014. Like his Invesco counterpart, Kiesel is supported by two impressive comanagers, Mohit Mittal and Jelle Brons, who were named here in 2016. Brons is a credit specialist and senior portfolio manager, while Mittal was promoted to CIO of core strategies in 2023, and also oversees several of the US corporate trading desks.
The management team at Invesco is backed by a sizeable, 60-plus-member credit research team, which is larger than most peers; the strategy earns an Above Average People Pillar. Pimco, however, still stands head-and-shoulders above the crowd with a whopping 80-plus credit research team, and earns a High People Pillar rating.
Process
Top-down themes feature meaningfully in both investment approaches, though security selection typically drives a greater portion of the outperformance at Pimco, while Invesco’s strategy’s returns are driven by medium-to long-term investment themes. Both earn Above Average Process Pillar ratings.
Invesco’s investment strategy team is responsible for providing the portfolio managers with a menu of investment ideas, developed during the final week of a recurring four-week cycle that also involves Invesco’s macro and credit research teams. The managers implement themes by drawing on credit analysts› recommendations and applying relative value analysis to find attractively priced opportunities.
As a member of Pimco’s investment committee, lead manager Kiesel helps formulate the top-down themes that show up in the portfolio’s interest-rate positioning and sector weights, while Pimco’s corporate specialists scrub the universe for bottom-up ideas.
Portfolio
In recent years, the Invesco portfolio has sported a significant underweighting in the US, balanced by a significant overweighting in Europe. This positioning aligns with the team’s long-held thesis that the US is further along in the credit cycle, with less attractive valuations compared with Europe. For example, as of August 2024, US exposure accounted for about 30 percent of the portfolio’s assets versus nearly 58 percent in the benchmark. In contrast, European exposure reached nearly 30 percent, approximately 10 percentage points above the benchmark weighting. The Pimco team on the other hand have been more agile on regional tilts, lowering US exposure to 50 percent of the portfolio in 2022, but dialing it back up to 75 percent mid-2023.
The financials sector has dominated both of these portfolio’s sector allocations for at least the past decade. Financials typically account for half of the Invesco portfolio, (versus a 40 percent weighting in the benchmark), with a preference for subordinated debt over senior bonds. The team has historically favored these companies for their liquidity and higher spreads relative to other sectors. Coming from a slightly different angle, the Pimco team focuses on issuers that they view as having positive rating trajectories in sectors deemed undervalued. Within financials, they have favored the senior debt of large established banks that have deleveraged following the 2008 financial crisis.
Performance
Both strategies have delivered compelling long-term results. Over the past decade, higher credit risk exposure and the focus on the financials sector—particularly subordinated debt and alternative Tier 1 bonds—have been key contributors.
The Invesco team’s penchant for higher-yielding assets has occasionally led to steeper losses versus peers in credit downturns, as evidenced by its bottom-quintile returns in credit market selloffs, but the strategy tends to rebound strongly following a weak performance cycle. For example, in 2023 the fund staged a dramatic rebound following a difficult 2022, by overweighting European subordinated debt and AT1 bonds. These bonds initially sold-off during the March 2023 banking crisis but surged by year-end and into 2024 as investor confidence returned.
The Pimco team have also had occasional struggles, though. The fund suffered from weak performance in 2020 through 2022—a trough unique in its otherwise solid track record. It struggled in the pandemic-driven selloff in 2020 because of significant stakes in many of the industries most affected by the pandemic, such as travel, leisure and real estate investment trusts. In 2022, exposure to emerging markets stung, especially through the portfolio’s stakes in Russian sovereign and Chinese corporate debt—landing the fund in the bottom quartile of its peer group. However, the team’s bond-picking skills remain intact and drove the fund’s strong recovery in 2023 and 2024.
Jeana Marie Doubell is investment analyst fixed income EMEA at Morningstar. Morningstar is a member of Investment Officer’s panel of experts.