A common and unfortunate misperception in the market is that yield equals return. On the contrary: high yield markets are inefficient as many market participants are not driven by traditional risk-return considerations. Investors are biased towards overpaying for higher-risk credits and tend to exhibit herd mentality. By being contrarian, we steer clear of the herd and avoid getting trapped with too many investors in consensus positions. This means we buy and sell against the prevailing sentiment of the time.
With our quality-tilted investment style we seek to add value by avoiding losers, meaning lower drawdowns in bear markets. The structured top-down approach can add value in bull markets as well. Robeco was the first European investor to launch a global high yield credit strategy and still contains one of the world’s largest truly global high yield funds: EUR 8.7 billion/USD 9.8 billion*.
Our High Yield strategy captures market inefficiencies through the use of two main performance drivers:
Determining what level of risk to run at any given moment in the market cycle is essential for adding value to a high yield portfolio. We assess the expected credit environment every quarter, and change the portfolio’s credit beta accordingly. This allows the portfolio to benefit from or weather the anticipated stage of the market cycle.
Credit issuer selection
We use fundamental analysis to target mispriced bonds and instruments, researching the issuer’s business position, sustainability and financial profile. The focus of all ESG analysis is on downside risk, absolute impact and financially material issues. We have a structural underweight in lower-rated credits. The selection process focuses on winning by not losing. The strategy has a long-term investment approach that avoids unnecessary trading, which enhances our ability to generate alpha.
Accurately measuring credit risk is a significant challenge for high yield investors. In 2003, Robeco co-developed an innovative method1 to provide insight into the nature and extent of risk in credit portfolios: Duration Times Spread (DTS). Based on the DTS of each bond, portfolio managers can implement their views more effectively. DTS is now widely accepted and market standard among investors.
1The results were published in “Duration Times Spread: A new measure of spread exposure in credit portfolios”, The Journal of Portfolio Management, 2007, vol. 33. no. 2, pp. 77-100
Portfolio managers Sander Bus and Roeland Moraal are among Europe’s most experienced high yield managers. They have been working together in high yield since 2003. Christiaan Lever joined in 2016 as a senior portfolio manager. The managers are supported by a team of more than 25 career credit analysts with on average over 15 years’ experience. Analysts are focused on creating the deepest possible issuer research and are clustered around sector specializations, covering issuers across the rating spectrum from investment grade to high yield and emerging markets. This allows them to identify and exploit crossover opportunities including fallen angels and rising stars. Analysts have the same remuneration package as portfolio managers.
This strategy promotes, among other characteristics, environmental and/or social characteristics, which can include exclusionary screening, ESG integration, ESG risk monitoring and active ownership. It is classified as Article 8 under the EU Sustainable Finance Disclosure Regulation.
Our issuer analysis goes beyond the traditional financial factors and includes the issuer’s performance on ESG factors. To make a well-informed investment decision, we deem it essential to take into account those ESG factors that can have a material impact on the financial performance of the issuer. This perfectly matches the basic need to avoid the losers in credit management, as many credit events in the past can be attributed to issues such as poorly designed governance frameworks, environmental issues or weak health and safety standards. The aim of ESG integration is to improve the risk-return profile of the investments; it does not have an impact goal. ESG analysis is fully integrated in the bottom-up issuer analysis. We have defined key ESG factors per industry, and for every company we analyze how the firm is positioned versus these key ESG factors, and how this impacts the fundamental credit quality.
Unmoved by market sentiment and herd behavior, and instead making decisions based on research, conviction and long-term focus
Preference for higher credit quality of corporate debt issuers
A true understanding of the topic has been in our DNA since the start
Team has long-term experience and low turnover