An early reading of the potential eurozone difficulties and strong moves into non-financial debt in core European nations has helped ECM’s Derek Hynes rise to the top of the European bond sector.
Hynes, who is lead manager on the European Credit Fund Sicav – Danube, returned 56.2% over the past three years. This is while the average manager in his sector returned 16.7% and the Barclays Euro Aggregate Corporate TR benchmark rose 21.44%.
Speaking to Citywire Global, he said the deleveraging cycle had proven very favourable for credit investors and he had taken this opportunity to bulk up positions in non-financial corporates, while increasing overall diversification in the fund.
Hynes began to adjust his positioning in March 2010 following the first Greek bailout and the beginning of difficulties in the eurozone.
‘We started to build up our allocation to non-financial corporates and differentiating between what was core Europe and what was peripheral and have taken a very considered approach to moving away from peripheral bonds. I think that has benefitted us and helped lower volatility,’ he said
The main areas of allocation for Hynes proved to be in Germany, Scandinavia and, to some extent, the UK. This was while retaining some exposure in France and the Benelux nations but with a constant eye on risk.
‘We did a lot of stress testing of our portfolio at the start of last year and then we started to look at the allocations and began changing them in the second quarter. This was at a time when the market was starting to get overvalued for the risks evident and was arguably losing its discipline.'
‘The market got particularly choppy in the second half of 2011. So we took a look at a lot of the high beta names and the banking sector exposure.’
The Spanish/Italian threat
Echoing comments made previously by high yield fund managers over the possible impact of further downgrades to Spanish and Italian debt, Hynes said this was a more realistic ‘worst case scenario’ for the eurozone than a full scale break-up.
‘If Spain and Italy do receive further downgrades and migrate to sub investment grade, which would require downward rating actions from the other two ratings agencies as only Moody’s have shown to be most aggressive on this, this could push us towards an endgame scenario.’
‘This could be a split into a North/South divide or go the other way and force everyone even closer into finding a long-term solution for the eurozone that involves closer integration.’
Ultimately, Hynes is positioning his portfolio for continued shocks and a depressed investment universe but is buoyed by his belief all EMU members are working collectively to a long-term solution.
‘Our positioning is that we are prepared to accept that we will probably have to still live with this scenario for months or quarters to come. There are still numerous chapters and verses to be played out before a long-term, sustainable outcome can be achieved.’
Hynes is aided on his fund by Euro Stars AA-rated manager Henrietta Pacquement (pictured), whose own fund, the European Credit Fund Sicav – Elbe, was the second best performing fund over three years. It returned 40.09% over this period.
Rounding out a remarkable triumph for ECM, AA-rated manager Jens Vanbrabant’s European Credit Fund Sicav – Interlaken, has returned 39.09% over the same period, making it the third highest performing fund in the Citywire rankings.