Partner Content, Chris Ellis, Managing Director of Barings European High Yield Fund, sponsor of the Fixed Income Market Focus event, discusses their portfolio and the importance of global high yield.
Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process, and the make-up of the investment team?
Our strategy targets high current income and attractive risk-adjusted returns by undertaking a rigorous credit-intensive approach to global developed markets corporate high yield bonds.
A key contributor to our performance over time is our large global team. One of the industry's largest, our high yield platform comprises more than 70 dedicated US and European high yield investment professionals1. With expertise and on-the-ground investment resources across multiple regions, we are uniquely positioned to assess relative value opportunities, especially given that large and well-established companies in the market typically issue debt across multiple currencies.
Our scale allows us to conduct detailed, bottom-up analysis of company financials, integrate environmental, social and governance factors into our credit assessment, and to actively engage with company management to identify attractive opportunities. We make investment decisions based on the expected long-term success of a company and believe that analysing the underlying credit fundamentals is paramount when it comes to mitigating high yield bonds' highly asymmetric return profile. Through this time-tested process, we construct high conviction portfolios that are actively managed to perform through the ups and downs of credit and economic cycles.
Prior to inclusion in our portfolios, each credit is fully underwritten and vetted by our team of credit analysts and each debt tranche must be approved by the respective US or European Investment Committees, which consist of the most experienced investment professionals in our business.
How are you positioning your portfolio?
Portfolios are constructed based on the merits of each company on the Investment Committee approved Buy list rather than relative to a given benchmark. Given the asymmetric return profile we place a high emphasis on diversification with our global high yield portfolios typically investing in 175-200 companies (vs the developed market non-financial high yield index's over 1,150 companies). Positioning is both absolute (we view a Market-weight position as broadly in the 50 basis points range) and active (Top 10 conviction positions generally account for 10-15% of a portfolio and portfolios may have no exposure to large benchmark issuers).
Over the last twelve to eighteen months we have increased the overall credit quality of our portfolios by reducing exposure to CCC-rated, the highest risk of default category, bonds given the macro uncertainty and impact of elevated interest rates. We have also looked to reduce exposure to cyclical sectors such as Automotive, Chemicals, Media and Retail, favouring the more defensive and inflationary resilient sectors such as Telecommunications and Healthcare. Portfolios also maintain an immaterial exposure to the challenged Real Estate sector.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
We believe the global high yield corporate market continues to provide attractive total return potential given bond prices remain discounted combined by the markets' record low duration and maturity profile [Exhibit 1]. The market convention is to calculate spreads and yields to worst, which for discounted price bonds equates to their final legal maturity. Performing high yield issuers however will proactively look to refinance their debt at least 12 months ahead of final legal maturity due to auditors' going concern, rating agency downgrades and trade working capital considerations. The actual return profile of 2025 and 2026 final legal maturity bonds is therefore likely to be significantly higher than the stated spread and yield characteristics given the above. With the lower quality leverage loan market successfully extended its maturity profile during 2023 providing comfort that the higher quality bond market can do the same, this is an area of the market we have been actively targeting.
Exhibit 12
Chris Ellis is Managing Director of Barings European High Yield
1Source: Barings as at 31 December 2023
2Source: Bloomberg, Barings. As of December 31, 2023. Global High Yield bond market represented by the ICE BofA Non-Financial Developed Market High Yield Constrained Index (HNDC). For illustrative purposes only. This analysis is intended to demonstrate only the specific elements discussed. This analysis does not represent all of the elements and variables that could be factored into the potential outcome. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
For Professional Investors / Institutional only. This document should not be distributed to or relied on by Retail / Individual Investors. Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 24-3489597
