We continued to draw on our bottom-up fundamental research to identify names that we felt continued to offer long-term potential. Given limited issuance in primary markets over the period and the uncertain environment, we were more active in the secondary market. However, we remained selective, focusing on credits with stable fundamentals that have the potential to withstand uncertain economic environments. �

Long-term credit convictions drive industry allocation

With the ongoing macroeconomic and geopolitical uncertainties, including those arising from the Russia-Ukraine war, we continue to evaluate� potential implications on issuers in specific industries.� However, our research-based, flexible approach will remain important going forward as we expect to see greater market emphasis on fundamentals over the longer term.

The cable and satellite TV sector remained one of the portfolio's largest sector overweight positions. We remain positive on the overall outlook for this sector as it stands to benefit over the long term from trends in media consumption and stable, recurring revenue business models. We also remained overweight leisure and consumer-oriented service companies as we continue to return to normal pre-pandemic behavior in the region. However, we reduced this slightly over the period as rising costs could weigh on consumer demand, especially in a rising rate environment.�

By contrast, we maintain a corresponding underweight to wirelines, as many of the issuers face secularly declining businesses. We also maintained our underweight allocation to the traditional banking sector as we see less value in European banks compared with other segments of the European high yield market given the relatively lower interest rate outlook for Europe compared with the U.S.

In other moves, we also became overweight the building and construction sector and increased an underweight to transportation; however, this was mostly because of security-specific transactions.

B rated names continue to offer attractive relative value

Our overall rating allocation is a byproduct of our bottom-up security selection. While the near term could see further swings in market direction, we continue to identify names within the B rated category that offer attractive valuations relative to favorable fundamentals. These convictions drive our overweight exposure to the rating segment. We hold a corresponding underweight to the BB bracket, although we made efforts during the period to reduce this as many high-quality names have traded lower and now offer significant relative value.

Sovereign views and policies are a key input to risk assessment

Proprietary sovereign views serve as a key input in our overall risk assessment. Our research-based, flexible approach will be particularly important going forward. As different fiscal, monetary, political, and health responses play out between countries, our ability to capture dislocations can help reduce volatility in the portfolio while being best positioned for a continued post-pandemic recovery over the long term.

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Divergent bankrupt policies and recovery rates across countries adds an additional layer of complexity, highlighting the importance of an active approach to high yield investing. We believe our research in this area helps us account for the different levels of risk related to variance in default and recovery policies and where spread levels offer the best compensation for these risks. Our holistic view of capital structures and willingness to invest in holding companies is reflected in an allocation to companies domiciled in Luxembourg. Any non-euro-denominated bonds are fully hedged back to the euro.