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Low volatility vexed many in 2017, says $25bn HY star

Low volatility vexed many in 2017, says $25bn HY star

This year's low levels of volatility, despite rising rates and geopolitical headwinds, have caught out many bond buyers and pushed them into increasingly unwieldy assets, Citywire + rated Gershon Distenfeld has said.

Speaking to Citywire Selector, Distenfeld, who co-runs the $25.2 billion AB FCP I-Global High Yield Portfolio, said the year was split into two major periods for high yield investors.

‘It was a tale of two markets in 2017, especially for our high yield fund. We increased exposure to emerging markets, particularly local currency, at the end of 2016 and that worked very well in our favour, but not so much in the second half of 2017,' he said.

‘The biggest challenge we encountered was a clear lack of volatility. We would have liked more movement as it would have created more opportunities. It may sound clichéd, but the strongest suit in 2017 was being diversified, so we prioritised diversification and there was no one real cheap asset worth buying.’

Distenfeld said macro-led volatility is a common occurrence for bond managers – highlighting the sovereign debt crisis and oil price collapse as recent examples – but 2017 was an exception. Here he said investors may have overstretched to fill the low volatility gap.

‘While these throw up opportunities, they also serve as good indicators of where it may not be advisable to be invested. With that in mind, we don’t like floating rate bank loans, for example, as these are difficult to judge,’ he said.

One concern Distenfeld raised was the continued investor focus on where we are in the credit cycle, particularly given central bank rate rises and tightening monetary policy.

‘We hear a lot about assets being late-cycle, but how many late cycles can we have? Did the commodities price collapse mark the end of that cycle or just a downturn in a continuing cycle? That is hard to say. So, what we do instead is start with individual names we have faith in and go from there. That is what we did through 2017 and what we will continue to do in 2018,’ he explained.

The AB FCP I-Global High Yield Portfolio returned 16.9% in US dollar terms over the three years to the end of December 2017. Its Citywire-assigned benchmark, the ICE BofA Merrill Lynch Global High Yield TR, rose 20.6% over the same period.

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