The short-call part of the European high yield bond market has provided protection and performance during a time of increased uncertainty among fixed income investors, Aberdeen’s Ben Pakenham has said.
Pakenham upped exposure to short-call bonds – those which a company can call at much short notice – in his €718 million Aberdeen Global – Select Euro High Yield fund over the past two years.
The Citywire AA-rated manager said he has allocated as much as 25% of the fund in bonds of this nature, which has lessened the beta and duration of his European high yield bond fund.
‘One of the biggest contributors to performance has been our large exposure to short call bonds,’ he told Citywire Global.
‘These are usually older, high coupon bonds which maybe mature in three or four years but make up increasing sense for the big companies to call them over the next year or 18 months in order to lower the coupon and lower the cost of debt.’
Pakenham said this exposure had been particularly important since the start of the year, during a period which saw government bonds and US high yield bonds come under increased pressure.
‘That has worked out exceptional well for us and, even with the market volatility, this strategy has been bulletproof. There is very little credit risk involved and very little interest rate risk from these positions,’ he said.
Going for quality
While volatility has had an impact on the wider market, Pakenham now believes it is time to add higher quality names to his portfolio. At present he has over 60% of the fund invested in bonds rated B or lower but has added to his BB-rated exposure.
‘What we have done more recently is try to take advantage of the opportunities in the BB part of the market. They have come under pressure in the wake of government bonds, notably bunds, moving about quite heavily.’
‘So we have entered the market and looked to increase the overall credit quality, we have reduced some positions and upped BB-rated exposure from around 10% to 20% over the past few months,’ he said.
The fund year-to-date has returned 4.6% in euro terms while its Citywire-assigned index, the BofA Merrill Lynch Euro HY Constrain TR EUR, rose 2.96% over the same period.
Over the three years to the end of July 2015, the fund returned 31.9% in euro terms against an index rise of 33.4% over the same period.