Citywire A-rated manager Fraser Lundie has upped exposure to emerging market corporate high yield bonds.
Speaking to Citywire Global, Lundie said he had upped his weighting in the Hermes Global High Yield Bond fund over the past six months.
This has seen him increase holdings from 10% to 15% at the end of April, which is mainly in emerging markets corporate debt and companies in the basic industries sector.
‘In a period when the consensus is more on developed markets, short duration and high quality, we decided to take the opposite direction and buy the long end of the curve,’ Lundie said.
On the corporate side, Lundie likes large caps benefiting from weakening currencies in the EMs, such as Mexican industrial giant Cemex, Brazilian steel producer Gerdau and the Russian gas and oil service group Rosneft.
The other driver of his strategy, Lundie said, is a switch up in quality trade. He said this enables him to buy an investment grade EM company instead of a B rated US one, for example. The third aspect of Lundie’s current approach is to focus heavily on the long end of the curve.
‘I don’t see a spread risk so much as call risk in the market. We use CDS to avoid this and, in doing so, optimise the convexity profile of the portfolio. In a low default environment like the current one, the goal is to pick up the right security, not just the right company,’ he said.
Europe and US
Lundie still likes old-style financials in Europe, although he expects new regulatory rules to hit the market later this year, and invests in the region through CDS.
In the US, where he has a significant underweight compared to the benchmark, he is more focused on corporate bonds which have were hit last summer by the interest rates-related sell-off.
‘We favor them because they don’t have call risk, they represent potential M&A targets and they trade below par,’ he said. ‘In regards to Europe, we think it may be too late for some quantitative easing and we see deflation as a real risk.’
Lundie, in a similar vein to JP Morgan bond manager Bill Eigen, believes that the liquidity problem for bond funds is even worse than before the financial crisis. But he doesn’t think that holding cash is the best solution.
‘I wouldn’t hold cash. I would keep some liquidity through CDS and invest globally,’ he said. Lundie added hedging against interest rates risk is complicated.
‘We hedge just the component of the portfolio which has the strongest expected correlation with the interest rates risk, like HY bonds that tend to behave like investment grade ones. Or we access the company’s credit risk through CDS,’ he said.