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How to avoid soft closure of high yield bond funds

How to avoid soft closure of high yield bond funds

Being diversified and avoiding over-stretching into illiquid areas is the best way to avoid the soft closure of funds, according to AB’s Gershon Distenfeld.

Speaking to Citywire Selector, Citywire + rated Distenfeld, who co-runs the $24.2 billion AB Global High Yield Portfolio, discussed how the team deals with the capacity constraints which come with a blockbuster fund.

‘As a firm, we have definitely soft-closed funds that we feel we can’t manage any more. The fact we have the ability to go into many different asset classes is an advantage.

‘There are funds bigger than us in the US and some in Luxembourg, that only focus on one sector, such as the US high yield market. The fact we focus on high yield, local/hard currency, the mortgage market, EMs and even Asian high yield from time to time, has given us a really good opportunity set.'

When Citywire Selector last spoke to Distenfeld in May, the fund was at $22.3 billion, and since then has added just under $2 billion of net inflows. Despite the constant expansion, Distenfeld said managing at this level is not a problem.

‘If we doubled our size then it could be an issue, but we don’t have a hard number for when we would soft close, but we are definitely committed. When we feel like we can’t add the value we have historically, we will take appropriate action.

‘One of our best ideas today is still diversification, there isn't anything that’s obviously dislocated in markets. When dislocation happens you want to make sure you don't stretch for that little bit of extra yield, because that comes with a lot more risk.’

Diversity is key

Distenfeld said it’s key to be as diversified as possible and said the team has tried to be very disciplined, by biding their time in order to take advantage of future dislocation. However, he also highlighted that the team has begun to up risk levels in the fund.

‘In the past few months, we haven’t really made any wholesale changes. We have been running our risk levels relatively low to what we normally do and we have started to take that up over the last couple of months.

‘There has been a real steepening of the yield curve in the US and in parts of Europe too, which is usually associated with better environments for risk taking, on the broad macro side we have slightly pushed up our risk.’

‘We tend to watch the energy market very closely, we don’t have nearly as much exposure as we had last year when it was very cheap, but that’s something we are monitoring,’ he added.

The AB FCP I-Global High Yield Portfolio returned 13.48% in US dollars, over the three years to the end of July 2017. This compares with a 13.80% rise by its Citywire-assigned benchmark, the BofA Merill Lynch Global High Yield TR, over the same time period.

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