High yield bond specialist Ben Pakenham has upped UK exposure to 25% in his €600 million fund due to the country’s strong performance on default recovery rates.
Pakenham, who runs the Aberdeen Global Select European High Yield fund, said recovery rates among defaulted UK companies was better than many eurozone countries.
He told Citywire Global: 'The sterling denominated high yield gives us a good spread and yield pick up and the UK jurisdiction is very strong. Even in the worse case scenario of a default, recovery rates are very good in the UK.'
He contrasted that with the recovery process in Italy, where he said the default process was much more drawn out.
'In Italy, it can take several years to go through the default process but the UK is much more closely aligned to the Chapter 11 process in the US, and takes about a year.'
Pakenham says the fund normally runs at a default rate of around 2.5-3%, although that small capital loss is offset by a yield of between 6 and 7%. He also believes European high yield is currently in a relative sweet spot in the low default/gradual growth environment.
Slowly turning to growth
When default rate expectations start to rise spreads will begin to widen again but this is currently the perfect scenario for Europe, he said. While government bond yields remain an issue, we are slowly returning to a growth environment.
While Pakenham remains bearish on the mid-term outlook for government bonds, he is confident that there is no current bubble in high yield.
Some 60% of the fund is currently in B-rated bonds and just 15% in BB-rated bonds, compared to a benchmark of around 50% in the latter for the benchmark.
'We like the B-rated part of the market because default risk is very limited and it is yielding between 5-6%. We are actively managing the duration risk at around 2.5 years.'
Pakenham says the yield available on the BB part of the market, currently around 3%, is generally too low for his fund although he is keeping an eye on managing the fund's overall beta risk , with just 8% in CCC-rated bonds.
Over the past three years, Pakenham has returned 29.1% across two European high yield bond strategies. This compares to a rise of 24.6% by the average manager in the European high yield sector over the same period.