The team behind AllianceBernstein’s giant high yield bond fund have ventured into a little followed area of the housing market to unlock new yield plays for the fund.
Speaking to Citywire Selector, Citywire + rated Gershon Distenfeld, who co-runs the $22.3 billion AB Global High Yield Portfolio, highlighted the fund’s 8.47% bet on CMOs (collateralised mortgage obligations).
'Our allocation to CMOs is primarily in credit-risk sharing transactions. These are participating in the credit risk, sharing the risk with Fannie Mae and Freddie Mac, as they underwrite mortgages.
'These CRTs are around four years old and are about to become mainstream, we are one of the only investors in it,' he added.
Distenfeld said, historically, the US government or its taxpayers would insure the credit risk in mortgages, with just the interest rate being sold off post the financial crisis when the government 'took a bash on a lot of mortgages'.
'There was a desire to help investors underwrite the credit risk. Now, the type of risk given with the US housing cycle is quite attractive, which is why we have almost 10% of the portfolio there.'
Elsewhere, Distenfeld said nothing is particularly cheap in today’s market, although there is potential within corporate bond markets.
‘High yield junk bonds aren’t nearly as attractive as they were a year ago, I think that’s true. It is likely investors will get lower returns but I’m not in crash mode,’ he said.
With 36% of the portfolio allocated to high yield, Distenfeld said there could be a sell-off with a ‘normal kind of drawdown’, but he said this year is likely to see a return in single digits rather than last year’s double-digit returns.
'At the beginning of 2016 the real dislocation in the US was the US high yield market, so we ended up having the highest exposure we have ever had in that market with over 70%, now it’s closer to 40%.
'We have been diversifying into other areas, we have upped our emerging market exposure from about 10% to 20%. We have been investing in commercial and residential mortgages as well as a small amount in Europe, on a currency hedge basis.'
The AB FCP I-Global High Yield Portfolio returned 11.95% in US dollars, over the three years to the end of April 2017. This compares with a 10.74% rise by its Citywire-assigned benchmark, the BofA Merill Lynch Global High Yield TR, over the same time period.