Threadneedle European High Yield Bond manager tells Barney Hatt how he juggles bottom-up company research with top-down portfolio construction to implement convictions
Fund manager Roman Gaiser has had an impressive year with his Threadneedle European High Yield Bond, benefitting from the rally in high-yield debt markets.
Gaiser has managed the fund since October 2005. During his tenure, the fund has consistently outperformed its peer group.
The £896m Threadneedle European High Yield Bond fund is ranked second out of 52 vehicles in the IMA Global Bond sector, with a return of 45% over 12 months to 26 April compared to an average increase of 13.7%, according to Morningstar.
Launched in March 2000, it is ranked 4 out of 39 vehicles in the sector over five years, up 67.4% compared to a 43.4% average rise. Over three years the fund is up 46.5%.
The fund invests primarily in sub-investment grade high-yield fixed-income securities issued by companies domiciled in Europe, or with significant European operations, and seeks to maximise performance mainly by way of income generation.
What is your investment strategy?
We look to build convictions, which we get from two sources. One, knowing the individual high-yield names from bottom-up company research. Two, top-down portfolio construction, where we develop a view on the world and markets. We decide what type of risk we want to have and what type of risk we do not want to have. From these two strong inputs we look to build and implement our convictions.
What are the reasons for such strong performance over the past year?
The sector did extremely well and we are one of the funds that did particularly well within the sector. This was obviously after a strong rebound following 2008, which was a very tough year, but we performed very well in that period from the sell-off into the strength of the market.
It is a pure European high yield bond fund. Some of the funds in the sector have investment grade and high yield. Of all the asset classes which have performed very well high yield is one of the asset classes which has gone beyond previous highs. A major reason for this is the environment for high yield has been very favourable because we have had some steady growth. It is not super-buoyant but it is ok. We have some inflation but it is not very high.
We have had a strong improvement in credit quality. Corporate earnings have improved significantly in high yield and bounced back cyclically, and default rates in high yields have come down very quickly. We are currently in a low default environment because of decent liquidity and good risk appetite for the asset classes. People are happy to buy new issues and provide new finances.
All these factors combined have pushed down default rates and made for a very favourable environment which we believe will continue to be in play for the foreseeable future.
What shifts have you made to holdings in recent months?
We have been adding to names which will benefit from an economic upswing, names that are slightly more cyclical. We are now increasing our exposure in basic industries, mainly in chemicals.
The fund has also rotated out of some shorter dated lower yielding paper into single B paper which has more spread duration, and hence has more upside if the market continues to be strong.
We have increased the cyclicality of the fund to benefit from the ongoing economic improvement and also increased the maturity of the portfolio with a strong focus on single B names, which are the bulk of the core of the market.
How will the fund develop in the next year?
We are in an environment which is beneficial to high yield and our key forecast is decent economic growth in Europe and the US without being over-buoyant. We expect 2.5% growth in the US, maybe knocking on the door of 3%.
In Europe we also expect economic growth, although maybe slower than the US because of the austerity measures in place in some of the countries and the huge public deficits. But overall we see decent economic growth and a low default environment. This is an environment in which high yield will do well and if you combine it with ongoing interest from investors for income asset classes such as high yield and emerging market debt should do very well.
What is your outlook for European high yield bonds?
After 10 years the European high yield bond market has come of age in terms of size and diversity. Launching a dedicated European high yield bond fund was innovative in 2000, but demand for the asset class has increased year after year since then. Furthermore, the strong performance of the asset class over this period, particularly when compared to other fixed income securities and equities, should confirm the relevance of this asset class to any truly diversified portfolio.
It is now an environment more suitable for stockpicking again rather just being thrown around by the directional mess of the market at the end of 2008 and the beginning of 2009. This should benefit people like us and the global bonds sector in general. We believe a focus on income is the right thing to do. This is not about talking against equity but having a significant part of income will be quite important. It is an asset class which we believe will benefit strategically from asset allocation, not just for individual investors but pension funds as well.
The outlook for global economic growth remains positive and corporate earnings particularly in Europe have been strong. Such an environment is supportive of the high yield bond market and we believe this constructive backdrop will continue into Q2. There have been some questions of value in the high yield market and whilst yields have fallen significantly, we believe this reflects a more fairly valued market. Furthermore, with default rates continuing to fall there is scope for further spread compression in the coming months.
