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Don’t run scared of CDS, says blockbuster HY manager

Don’t run scared of CDS, says blockbuster HY manager

Investors need to look past the ‘scary’ sentiment attached to credit default swaps and capitalise on improving fundamentals in the high yield market, AXA IM’s head of US high yield has said.

Carl Whitbeck, who oversees more than $22 billion in high yield bond assets, told Citywire Selector that his AXA WF US Dynamic High Yield Bond fund currently has 115% leverage.

This strategy, which was launched in October 2014, currently sits top of the 273-strong US Dollar High Yield bond sector, having returned 17.2% over the past 12 months against a sector average of 7.3% to the end of August 2017.

Whitbeck said he has been selling single name CDS protection as part of the high conviction bond fund’s strategy, however, traditional investors still have hang-ups over the use of derivatives of this nature.

‘CDS has been a scary word and leverage is a scary word. We are trying to prove that it is much less scary than people think. In this fund, yes we are using CDS but we are limited at 150% leverage, we are not upping positions by three or four times.

‘We are not using it to hit home runs off risky positions, we are trying to buy credits which we know are compatible with what we are interested in. So, we still want low default rates among our cash bonds, while adding some additional coupon from writing CDS protection.’

Looking at near-term performance, Whitbeck pointed to the hardships faced by the high yield market over 2014/15, where an energy-led collapse caused many funds to underperform.

‘If you look at our 2015 returns, when the market was extremely hard hit, our CDS exposure only cost us an additional 0.01 loss, so nothing extreme. While in 2016, when the market turned much more favourable for high yield, we added 275 bps as a result of our CDS protection.

‘It is a riskier strategy than our flagship fund, the Short Duration High Yield Bond fund, that is correct, but it is not a scary approach in that regard as the leverage is used efficiently,’ he added.

Over the 35 months since launch, the AXA WF Dynamic High Yield Bonds fund returned 18% in US dollar terms, while the BofA Merrill Lynch US High Yield Cash Pay TR USD, its Citywire-assigned benchmark, rose 16.2%.

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