Invesco's Kevin Egan has upped his exposure to B1 and B2-rated senior loans as he believes he hasn’t been sufficiently compensated for the risk involved in holding lower quality credit securities.
Speaking to Citywire Global, the Citywire + rated manager of the Invesco US Senior Loan fund said he added 4% in the B2 space and 3% in the B1 area year to date.
Egan is now overweight the sectors and has a 34% allocation in B1 senior loans and a 18% weighting in B2 securities.
‘We have consistently added to these areas as we were not being paid enough on a risk-adjusted return basis for the lower quality credit securities in the market,’ he said.
Earlier in the year, the lower quality credit outperformed the market, while B2 and better-rated securities underperformed.
‘In the second quarter of 2014, all the returns came from B3 and below. In order to outperform, you had to have a portfolio that was all B3 and below, and we were underweight that end of the market,’ he added.
The underweight exposure to the lower credit end of the market hurt Egan’s performance, which then recovered when volatility came in.
‘When volatility came back to the market, lower quality credit sold off, also following the oil price drop,’ he said.
Despite his preference for B1 and B2 names, Egan holds some Ccc names but is very selective in his picks.
‘The secret behind holding a Ccc name is to have a very high conviction in the security you are buying,’ he said.
In this area, the Citywire + rated manager owns the media company Clear Channel Communication (1.74% of the portfolio) as he said the firm has a significant intrinsic value.
‘It’s a slow growth business with a solid structure that offers good returns despite being strongly leveraged,’ he said.
Elsewhere, the fund’s largest position is in the mobile protection insurance company Asurion (2.97%).
‘The firm is B1 rated and has strong credit fundamentals. We own both the first and the second lien loans as the latter provides a higher yield,’ he said.
In the B2 space, the manager owns the US-based payment processing company Fist Data (1.70%). ‘We bought it at a considerable discount. The firm was extremely levered when it was taken private, but has now started a process of deleveraging,’ he said.
Overweight oil and gas
Egan is still slightly overweight the oil and gas sector but is mainly exposed the pipeline and midstream assets companies as well as oilfield services firms.
‘The first ones are not exposed to the price fluctuations, but to the volume of the oil carried in the pipelines. On the other hand, the oilfield services businesses have 2-3 year contracts and won’t suffer until 2017 at least,’ he said.
Over the past three years, the Invesco US Senior Loan fund returned 22.89%, while the Credit Suisse Leveraged Loan index rose 20.48%.