Growing dispersion in the global high yield bond market is benefiting active managers in the sector, according to Citywire + rated Sander Bus.
Diverging performance figures within sectors and between particular issuers is increasing, he noted, adding that issuers in sectors that are in structural decline, such as bricks and mortar retail, hospitals and fixed-line telecoms, have been volatile and sensitive to earnings numbers.
‘Credit selection, to which we allocate between 70% and 80% of our risk budget, is increasingly profitable,’ he said.
His Robeco High Yield Bonds fund takes third place in our risk-adjusted ranking of the sector’s strongest players over the past three years.
Bus said the fund’s top-down beta policy and bottom-up issuer selection are the main drivers for the fund’s performance. The Robeco High Yield Bonds fund returned 14.62% over the past three years, compared with average manager’s 13.03%.
For its top-down beta policy, Bus said Robeco sets the beta of the fund’s portfolio based on the credit’s quarterly outlook. For its bottom-up issuer selection, Bus said Robeco focuses on superior underwriting skills that are built on the strength of
Robeco’s credit research setup.
Focus on quality
Robeco also has a quality bias in its high yield strategy. ‘We are consistently underweight the lowest-rated part of the investment universe, but we also apply this quality bias in other parts of the rating spectrum,’ Bus said.
Bus added that he has also reduced the beta of the fund’s portfolio to below one. The fund focuses on issuer selection and the alpha that it generates from that, from a defensive starting point.
Bus explained that there are three ways to implement this beta reduction.
The first is to move up in quality by reducing the allocation to CCCs and Bs in favour of BBs and selected investment grade credits.
The second option is to move towards more defensive sectors, particularly financials.
Finally, Bus suggested maintaining sufficient cash in the portfolio, which can be put to work once volatility further increases, creating more tactical opportunities.
Lundie, who is the co-head of credit and a senior credit portfolio manager at Hermes Investment Management, has increased the fund’s exposure to longer dated and higher quality credit.
Although investors continue to favour short duration exposure, this demand has artificially steepened credit curves to extreme levels.
‘We think investing in better quality companies for longer rather than forfeiting on quality is a sensible allocation of capital at this late stage of the credit cycle,’ Lundie said.
On the fund’s strong performance, Lundie said the fund has correctly positioned itself recently to outperform cyclical credit after the energy downturn of 2015.
‘Specifically, we have been adding to Enbridge in the pipeline space, which we see as having the scale and balance sheet strength to remain relatively uncorrelated to underlying commodity prices,’ he said.
‘We continue to see pockets of value in this space as the behaviour of firms remains conservative and the sector demonstrates more utility-like features, with hedging policies proving to be more stringent and non-core asset sales bolstering balance sheet health,’ he said.
This article was published in the May issue of the Citywire Private Wealth magazine.