Victor Verberk is bracing himself for more market volatility for corporate bonds. As a bond investor, he is also a risk manager, and there is no shortage of risks at the moment. "But as active research-driven bond pickers, we love this market." The analysts at Morningstar gave his contrarian investment style a Bronze rating.
"We are prepared for continuing volatility in the coming quarters," says Verberk, manager of Robeco Global Credits, looking forward. “The credit cycle has become less accommodating and liquidity is worsening, and that puts investors in a difficult position.”
The fund manager expects a recession in the US in the coming three years. "The US economy is currently in its seventh year of growth, and that is longer than the average period from peak to trough in the past. There are red flags going up everywhere, such as declining corporate earnings, suggesting that the economy is in the end phase of this present wave of expansion. We are seeing companies expanding their balance sheets and taking on further debt to disguise that. They are borrowing funds for mergers and acquisitions and share buybacks. In the past, recessions have always been preceded by declining profits. But the monetary authorities will do everything in their power to delay a recession for as long as possible.”
Since US financial markets are by far the most important on the planet, Verberk considers it very shrewd to follow the US business cycle closely and to focus on how much recession risk is priced into credit spreads.
In addition to economic risks, Verberk also sees increasing political risks that are threatening financial markets. Not only in emerging markets, but even in developed countries, too: Brexit, Donald Trump, mass immigration, terror threats and the rise of nationalist parties in Europe. It is no happy story.
In economic terms, Europe is the best place to be in Verberk's eyes. The cycle is only four years old here – since the sovereign debt crisis in 2012 – and less debt has been accrued in Europe than in the US. However, from the perspective of valuations, Verberk draws a different conclusion. “US corporate bonds are being traded with considerably wider spreads than their European counterparts,” he asserted. “But that's down to the higher leverage and the later phase of the cycle.”
Emerging economies present corporate bond investors with a mixed picture. Brazil is already in a very advanced stage of a bear market, while China is still in the phase of debt accrual and postponement of the necessary, painful measures. “All things considered, there is no distinct preference for a specific country or region. But in sector- and name-specific terms dispersion is large, and that creates some genuine opportunities,” according to Verberk.
‘Morningstar values the diversified approach with the option of implementing tactical deviations’
Fund manager Verberk explains how he adds value for investors in these uncertain and difficult circumstances. "We apply a contrarian investment style. That means that we add tactical risk in risk-off periods by investing more in credits of a lower quality or with longer maturities, for instance. But if these spreads tighten further to below average, then we will be net sellers of credit risk, for instance shifting some exposure from high yield to investment grade bonds or reducing our exposure to emerging markets.
The investment process of Robeco Global Credits is a combination of top-down analysis of markets worldwide and bottom-up selection. The emphasis lies on active bond selection". Verberk and his team have the freedom to also invest outside the universe of investment-grade corporate bonds as they see fit. Off-benchmark investing in high-yield bonds, emerging-market corporate bonds, ABS paper (asset backed securities) and derivatives is also part of their toolbox. But the focus lies on investment-grade corporate bonds, with the other categories representing a maximum of 20 percent. The currency risk is fully hedged to euros.
“As research-driven bond pickers, we love this market. We don't want to use too much of our risk budget for beta policy – making the portfolio more or less sensitive to the market. We've not yet reached the bottom of the current market cycle. We're still seeing credit quality deteriorating in the US and increasing risk in emerging markets. At the same time, central banks are determined to extend the cycle and keep rates low. And that's leading a strong ‘search for yield’. These are good reasons to not be too outspoken on beta. We are now focusing on finding attractive, quality corporate bonds in developed and emerging markets, factoring in both company-specific risks and sector and country risks. The average rating of the portfolio is BBB.”
”We value the freedom that Verberk has to invest using his conviction, and think that investors are in good hands with him and his team,” says Morningstar analyst Niels Faassen. “It is a broad and diversified approach with the freedom to make tactical deviations, but the portfolio has a solid core of investment-grade bonds. The bottom-up investment policy means there are the necessary deviations at a sector level relative to the benchmark, with Robeco Global Credits mainly invested in the industrials, services and financials sectors. And in financials, mostly in subordinated paper.”
Faassen points to Verberk's experience – now 19 years as a bond investor. He has been managing Robeco Global Credits since the fund was launched in 2014, and is supported by Peter Kwaak and Reinout Schapers. Verberk came to Robeco in 2008 as manager of Robeco Euro Credits, a fund that he still oversees and that has the Morningstar Analyst Rating Bronze.
In terms of high-yield bonds, Verberk can fall back on the experienced management duo Sander Bus and Roeland Moraal of Robeco High Yield Bonds. That fund, which has a Silver rating, was the main focus of the last article in this series of Morningstar Analyst Ratings for Robeco funds.
“The experience, size and stability of the management and analyst team are an advantage for Robeco Global Credits,” suggests Faassen. “The consistent manner in which they have managed to create value for investors in the past through bond selection strengthens my confidence in the team and the investment philosophy. That's why we've awarded this fund the Bronze rating.” This means Morningstar expects the fund to perform consistently better than comparable funds and/or the index over an economic cycle.
Analyst Faassen remarks that since its launch in July 2014 until March 2016, Robeco Global Credits (average annual return of 4.16%) has comfortably outperformed the Morningstar category ’Corporate Bonds Global - EUR hedged’ (1.18%) and the benchmark Barclays Global Aggregate – Corporates (EUR)(2.74%).1 A period of two years is usually too short to draw any strong conclusions from performance, suggests Faassen. “But Verberk has managed a similar mandate since 2010 with above-average results. And that says a lot. Over the last five years, he managed – corrected for costs – to fairly consistently beat the benchmark and competitors. In three of the last five calendar years he beat the benchmark. The short track record of Robeco Global Credits necessitates some caution for now. But the experienced management team and solid investment process convinced us.”
1 Robeco Global Credits IH EUR share class, figures are net return based. The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future.
**** (as of March 2015)
Morningstar Analyst Rating for Robeco Global Credits IH EUR
Bronze (as of March 2015)
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.
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.
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.