JP Morgan's Stealey: Why we have halved our high yield exposure this year
Improving portfolio credit quality behind fund's plans
Iain Stealey, who manages the £65.2m JPMorgan Global Bond Opportunities fund alongside Bob Michele, has been reducing the fund's allocation to high yield over the course of this year and upgrading the credit quality.
Stealey pointed out that the strategy has had a "pretty meaningful allocation to high yield since its launch six years ago".
The 'toxic mushrooms' in the high yield market
At times, over 50% of the portfolio has been allocated to the high yield space.
"We have reduced that pretty significantly," he said. "We are running at slightly over 15% today and that has halved since the beginning of this year."
Stealey explained that high yield "has had a very good run this year", with double-digit returns on most high yield markets.
He also said at current spread levels "you are not really compensated for what we believe is a slowing global growth environment".
He added: "Hopefully, we will get an opportunity to reallocate back if we see spread widening and some underperformance of that market."
The managers have spent this year upgrading the credit quality in the portfolio, which Stealey observed was part of "a general move across the market to go up in quality".
"We were running with a BB+ credit quality earlier in the year. We are now BBB-," he said.
"In an environment where high yield has returned double digits, you would typically expect the CCC component of that market to reach maybe 20%. Typically, CCC outperforms in big rallies and it underperforms in big sell-offs," Stealey explained.
"What happened this year is that we had this double-digit return, but it has been predominantly driven by BBs - the highest credit quality within high yield. BBs are up something like 13%, I think CCCs are only up 5% or 6%."
Stealey said the decline in bond yields "is not done yet", explaining there was "nothing out of the norm" with the level of yields, "given the level that central banks are fixing cash rates at".
He added that until central banks start to normalise policy, which he believes is a long way off, then their base case is that "yields grind lower from here, as we would expect more central bank easing into 2020".
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Following the US Federal Reserve's third rate cut this year at the end of October, Stealey said weakness in the jobs market would prompt "more action" from the central bank.
He added: "We were all talking about the inverted [yield] curve not that long ago. But what you could see is, if the Fed moves a bit quicker than the market is pricing, that curve starts to steepen back up again."
Over the past year to 4 November, the fund has delivered a return of 7.3%, in line with the IA Sterling Strategic Bond sector average of 7.6%, according to data from FE.
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