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Robeco High Yield Bonds: getting more than you pay for

02-03-2016 | Insight | Sander Bus

In the volatile high yield bond market Robeco High Yield Bonds’ investment process has to prove its strength. Morningstar is convinced it can. “Because of its stable and experienced management team, solid track record and low costs, this fund deserves Morningstar’s Silver rating.”

  • Investment opportunities arise, particularly in stressed markets
  • Robeco High Yield Bonds has lower downside risk compared to peers
  • Investment process offers considerable freedom
Bears abound in the high yield bond market. Volatility is being fed by the recent fears of a US recession, the ongoing concerns regarding Chinese economic growth, and the resulting low prices for oil and commodities. Sure, there are problems, but some are more a matter of perception. “Some sectors within the high yield market are showing significant weakness, but the asset class as a whole can provide investors with solid returns as long as they take a cautious and focused approach”, states Sander Bus, portfolio manager of Robeco High Yield Bonds. “Investment opportunities arise, particularly in stressed markets. The high yield bond market is a long-term market and investors must keep their nerve and not be put off by day-to-day volatility.”

Investment process proves its worth
Now is a good time for Robeco High Yield Bonds’ bottom-up investment process to prove its strength, as it has done in the past. The fund has actually increased its risk-adjusted market exposure, or beta, to an overweight 1.1 on the strong belief that positive returns will come to those who are patient. A beta above 1 means that the fund moves more than the market does. So if markets go down the fund falls further, but if they rise the fund gains more.

"We are actively looking for opportunities in sectors where the sentiment and management behavior is shifting in favor of bondholders", says Bus. "We have been reducing our underweights in the energy and metals & mining sectors by buying into companies that we assess as likely survivors and that have been dragged down by the weak sector trends. But we remain underweight in the lower quality names."

"In metals & mining we have moved to a small overweight because we feel that the consensus has become too bearish and metal prices seem to stabilize. It is generally a case of finding those companies that are sufficiently capitalized to ride out the storm. In the metals & mining industry we see some individual companies actively strengthening their balance sheets by reducing debt. Although equity investors don’t like this, it is in favor of bondholders like us."

Also in the CCC-rated segment of the high yield bond market the weakest companies are dragging down the rest, according to Bus. For a long time the fund manager has been underweight in companies with a triple C credit rating and overweight in higher quality issuers with ratings of B and above, as he beliefs that the compensation for risk in this risky segment of the high yield bond market is generally insufficient.
"But for the first time for a long time we now see value in some specific CCC bonds that trade at levels that are fundamentally not justified. Overall we will stick to our quality bias and here again it comes down to specific investment opportunities at specific companies."

Adding value in up and down markets
It is Sander Bus’ consistent approach that has convinced Morningstar analyst Niels Faassen to give Robeco High Yield Bonds a Morningstar Analyst Rating of 'Silver'. This means that Faassen expects the mutual fund to structurally achieve higher overall returns than similar funds and/or the benchmark over an economic cycle.

"Bus focuses on the higher segment of the high yield bond market, has a conservative approach but is able to add value for investors in both rising and falling markets", says Faassen. "It is interesting to see how Bus deals with energy companies. For a long time he was pessimistic about the energy sector with its highly leveraged companies. We believe that the fund has sound risk management and employs a disciplined investment process."

'We appreciate the fact that the managers invest in their own fund'

According to Faassen, Bus is not prepared to go to any lengths to generate returns. "The downside risk for Robeco High Yield Bonds is lower compared to other funds and it performs well in both rising and falling markets mainly through strong bottom-up selection. Over ten years Robeco High Yield Bonds has generated an annualized return of 5.71%1 and outperformed the benchmark (Barclays US Corp. HY & Pan Eur. HY. ex Financials) slightly (27 basis points) and the Morningstar category (Global High Yield Bonds - EUR hedged) by a considerable margin (137 basis points). A particularly good performance if you take into account the high transaction costs in the high yield market, especially in stressed markets, and the fact that the fund’s returns are compared to an index which has no transaction costs."

The investment process gives the Robeco fund managers considerable freedom. This means it is possible for them to take off-benchmark positions in investment grade bonds, financials and asset-backed securities. Bus: "Our financials exposure is small at around 4% of the fund’s value as per the end of January and we only invest in the higher quality banks. This is a great addition to the portfolio in terms of diversification and enhancing performance." For analyst Faassen this freedom is not an issue because of the fund’s solid risk management and its proven strategy over the long term.

Long tenure and low costs
Morningstar thinks highly of lead manager Sander Bus and co-manager Roeland Moraal. “Both managers are highly experienced and have been working on this fund for more than ten years. Bus has actually been involved in the fund since the very beginning in 1998. He is one of managers in Morningstar’s category of high yield bond fund managers with the longest tenure”, explains Faassen. "We are also pleased to see that the number of analysts keeps pace with the growth in assets under management. And last but not least, we appreciate the fact that the managers invest in their own fund. In our view, this ensures that the interests of investors and fund managers are better aligned.”

The estimated ongoing charges of 0.67%2 for Robeco High Yield Bonds are lower than the median of 0.85% for similar rebate-free funds in the Morningstar category ‘Global High Yield Bonds - EUR Hedged’. Faassen: "This fund is one of the cheapest funds in the category, which gives Robeco Global High Yield Bonds an important advantage. In this case, the low fee has nothing to do with the quality – you are getting more than you pay for.

When asked for, Faassen says it is hard to point out any negative aspects regarding Robeco High Yield Bonds. The funds scores well on management team, investment process, performance and costs. "It is good to see that a mutual fund with so much quality, experience and proven track record is so stable. Robeco High Yield Bonds is one of our favorite funds in the global high yield category."

1Source: Robeco FH EUR share class figures net return based on net asset value in EUR. The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future.
2Robeco FH EUR rebate free share class


Morningstar Rating for Robeco High Yield Bonds FH EUR
 **** (as of October 2015)

Morningstar Analyst Rating for Robeco High Yield Bonds FH EUR
Silver (as of october 2015)
Process: Positive
Performance: Positive
People: Positive
Parent: Neutral
Price: Positive

Morningstar operates independently and uses two different methods to analyze and rate mutual funds: the first is quantitative – based on historical returns (the Morningstar Rating, also known as the ‘Star Rating’). The second is qualitative in nature, focusing on several characteristics of a fund (the Morningstar Analyst Rating).

The Morningstar Rating uses an automated process with a scale of one to five stars to assess a fund’s historical returns. These returns are adjusted for risk and compared to the fund’s peers. Funds that have performed better than their peers over a period of several years receive four or five stars. Funds that perform less well are awarded one or two stars and those in between, three stars.

Forward looking
Since only historical data is used in the Morningstar stars calculation, the valuation is backward looking and says nothing about a mutual fund’s future performance. This is where the Morningstar Analyst Rating comes in, which is forward looking and takes into account factors that affect the future performance. The Morningstar Analyst Rating is given by an analyst after a thorough analysis of the fund. He awards the qualifications of Gold, Silver, Bronze, Neutral or Negative.

In order to arrive at an Analyst Rating, the Morningstar analyst assesses the five Ps of a mutual fund: People (management team), Parent (fund company), Process (investment process), Performance (for risk adjusted return) and Price (ongoing charges). Each P is rated with Positive, Neutral or Negative.

Based on the overall analysis, the analyst gives a positive (Gold, Silver or Bronze), neutral (Neutral) or negative rating (Negative). Mutual funds that are rated as Negative have a low score on one or more of the Ps. In the case of the Neutral rating, the Morningstar analysts believe that the fund will not make a negative or positive difference at the current time. Funds with the Gold, Silver or Bronze rating – ‘medalists’ – are expected to structurally achieve higher overall returns than similar funds and/or the benchmark in the long term – over an economic cycle. They are the winners of the future.

Under Review
A mutual fund can also have the status Under Review. The Morningstar analysts put a fund Under Review when there is a major change in the fund or the fund house, for example if the fund manager has left. They then determine whether the change affects the investment philosophy and revise their rating if needed.


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