The team running AllianceBernstein’s giant high yield bond fund are steering more towards emerging markets and away from US high yield, Citywire Selector has learned.
'There are a couple of spots in EM that we like, as there is a positive aspect of EM, which is that, even though growth rates have been slowing in many economies, we still predict them to grow faster than many developed economies,' he told Citywire Selector.
With 6.82% allocated to Brazil - and Brazil Notas do Tesouro Nacl (4.75%) (Brazilian treasury notes) taking the top spot in its core holdings, Distenfeld said Brazil is a good example of a country on the up.
‘Inflation is coming down and you still have high single digit local yields, it’s a place where real rates are positive and inflation has been coming down. This is something we don’t really find all that much.
‘The second reason is its continued rally. It’s getting a bit more expensive than other markets we invest in, be it the US high yield market, the European high yield market, the bank loan market and even parts of the structured mortgage markets.’
Areas of opportunity
Distenfeld said emerging markets have a lot more going for them on an absolute basis, which is why the allocation to the sector has shifted so much.
‘If you look back 18 months ago we had three-quarters of the portfolio in the US high yield market, now that number is down to about a third, we’ve just been finding better opportunities in other places.’
One of those opportunities is the lower subordinated part of the capital structure of various European banks, he said.
‘Our biggest exposure in Europe is to the broad financial space. The regulators in Europe over the past five years have really been trying to take the risk out and return banks to a more traditional model of taking in deposits and lending them out and earning a spread.
'This is as opposed to all the other risk factors they are taking in, which is not a great growth story for those banks but it’s a pretty good debt story. We want to lend to companies that aren’t going to take excessive risks and have more stable cash flows.
‘We don’t have as much exposure there as we did in 2009, for example, but it’s an area we seem to like’, he added.
The AB FCP I-Global High Yield Portfolio returned 13.48% in US dollars, over the three years to the end of July 2017. This compares with a 13.80% rise by its Citywire-assigned benchmark, the BofA Merill Lynch Global High Yield TR, over the same time period.