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Event risk is standard, VW is a special case, says BlackRock star

Event risk is standard, VW is a special case, says BlackRock star

If investors focused on fundamental analysis before rushing to sell once unforeseen events happen they could find excellent opportunities in the credit market.

That is according to Citywire + rated Owen Murfin, manager of the BGF Global Corporate Bond fund, who spoke about the impact of the Volkswagen scandal on bond markets at a roundtable in London.

Murfin, who was speaking alongside BlackRock's head of European fixed income, Citywire AA-rated Michael Krautzberger, used the German car maker's emissions scandal as a prime example of handling special events.

‘I think Volkswagen has been a very idiosyncratic risk, we’ve known about event risk for some time now, but most event risk is not related to management deception,’ he said.

‘Event risk is something we had to build a premium for because it’s rife, there are companies carrying out sizable M&A activities everyday and most of it is debt financed.’

Though the nature of the German auto company scandal differs from common event risk, Murfin said overall it is a question of investors’ perception of companies.

Gauging reactions

Commenting on the most recent market moves, Murfin said the reaction to bad news is currently more severe than ever before and this is a new phenomenon which will impact the recycling of risk.

‘Look at Glencore credit derivative spreads, it was 60 wider this week on no fundamental news. The names on which people are sceptical about do really tend to over react,' he said.

However, Murfin disagrees with managers rushing to sell stocks of companies rocked by uncertainty or scandals.

‘I’d say this is certainly the case in Volkswagen and Petrobras, where you have almost 11% yield for two-year paper, it doesn’t frighten me because you can do the fundamental work and see if you are compensated for taking the risk,’ he said.

‘I actually think ultimately Volkswagen is going to be a very interesting situation given how cash flow generative the company is and even in the worst case scenario it’s a bit like the BP situation when it had the oil spill.’

Murfin said circumstances like these are excellent opportunities for stock pickers and active managers as the beta of the market currently plays a huge role in generating alpha.  

‘The first thing an analyst has to do is quantify the liability and then do the stress test accordingly to see what the levering would look like, what that means for the rating and where that leaves the value.’

The BGF Global Corporate Bond fund returned 9.9% in US dollar terms over the three years to the end of August 2015 against a sector average of 0.39%. The fund's Citywire-assigned benchmark, the Barclays Global Aggregate Corp TR USDH, rose 9.7% over the same period.

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