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Best ideas: CS’s Gadsby buys into CDS approach to high yield

Best ideas: CS’s Gadsby buys into CDS approach to high yield

Everyone is searching for strategies that can flourish in a world that’s become especially challenging for fixed income investors.

Omar Gadsby at Credit Suisse in Zurich highlights a strategy that has proved very effective in the high yield space.

We have a product in Switzerland managed by UBP, it’s a high yield fund but it does not invest in high yield bonds. It’s selling the index credit default swap for the US, and for Europe, to define the high yield exposure.

The fund underperformed last year because the quality of the credit default swap indices is higher than the broad market, and last year we had a real junk rally of energy and metals & mining issuers.

But, the indices are better structured because they exclude subordinated debt. They only reference senior and liquid credit default swaps, and liquid issuers. So, in the market you capture 15%, with energy exposure in the indices you capture 6%, and that’s why they underperformed last year.

But over the past five years, the CDS has outperformed quite well and with much better liquidity. What has given me comfort in taking this exposure is that it’s a much safer strategy than it was pre-crisis because CDS are cleared daily, where pre-crisis they were an over-the-counter transaction and you had your counter-party risk.

It’s a bit different from a high yield ETF, which I don’t like. This is an active strategy which can overweight, or underweight, the US, it can reduce the size of the US exposure, it can reduce the size of the European exposure, that fund can be completely cash in a day, if required.

That’s the big difference between that strategy and an ETF that has to buy all of the bonds in the high yield market. So that’s a good example of innovation.

The UBAM Global High Yield Solution fund, managed by Christel Rendu de Lint and Philippe Gräub, has returned 57.2% over the past five years to the end of December 2016 in US dollar terms and is ranked 3rd out of 132 funds in its sector.

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