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The turmoil in financial markets sparked by Chinese growth concerns and the associated decline in commodity prices is causing investors to worry about the high yield credit market. Although some sectors within this market are indeed showing weakness, the asset class as a whole can provide investors with solid returns, providing a cautious and focused approach is taken, says Sander Bus, portfolio manager of Robeco High Yield Bonds.
Most eyes on US energy sector
Falling commodity prices have impacted the movements of many markets over the past months, but have particularly put pressure on the highly levered US energy market, which represents a large part of the US High Yield index. The collapse in the oil price has already led to some US shale companies defaulting, and more defaults are expected going forward. Robeco High Yield Bonds has always been underweight the energy sector, but since the sector started growing aggressively in terms of issuance and size, our underweight has become even bigger. This positioning performed very well in 2015.
Finding survivors in Energy and Metals & Mining
“2015 was a very strong year for Robeco High Yield Bonds, generating 4.5 percentage points of outperformance, but 2016 has proven to be rather volatile,” Bus says. “After the first few weeks of 2016, credit spreads in high yield markets have widened to such an extent that we started looking for buying opportunities, while sticking to our tried and tested long-term high quality approach.”
Development of US High Yield credit spreads since January 2015. Source: Robeco.
“We have actively been reducing our underweights in the Energy and Metals & Mining sectors by buying into companies that we assess as likely survivors and have been dragged down by the weak sector trends. It’s a case of finding those companies that are sufficiently capitalized to ride out the storm. We are able to identify these opportunities because we can rely on our excellent and proven bottom-up credit research process that we believe has proven itself over the years.”
Bus says the portfolio is now underweight communications, especially telecommunications (fixed-line companies), and overweight automotive, chemicals, paper, food & beverage, lodging, European cable and banking. The fund continues to prefer European high yield bonds versus those from the US.
Sticking to our long term quality approach
Bus stresses that the portfolio’s overall ‘beta’ – its risk-adjusted market exposure – remains close to 1, indicating that the fund’s current approach remains to stay in the market and navigate the turmoil, rather than pull out of it.
“We are sticking to our cautious, long-term fundamental approach and subsequent quality bias where we are underweight those companies with a a CCC credit rating, and overweight high-quality issuers with higher ratings of B and above,” Bus concludes.