During the first nine months of 2015, the Eurozone high yield market suffered from an increase in risk aversion owing to concerns about the Chinese economic slowdown and declining commodity prices. The Morningstar EUR High Yield Bond category is thus down -0.17% year-to-date (in EUR).
Market volatility took its toll on many hybrid bonds during the sell-off
Though only a few issuers in the Euro high yield space operate in the commodity space or are directly exposed to emerging markets, the asset class was broadly sold off as investors retreated to safer-haven assets. Nevertheless, the fundamentals of the asset class appear to remain sound. Over the last 12 months, the average default rate among European high yield issuers remained stable at 2%, a figure well below the long-term historical average. Many fund managers thus remain confident in high yield issuers’ financial health and some have taken advantage of the market turmoil to add to their top convictions at attractive prices.
In this context, Candriam Bonds Euro High Yield, rated Bronze by Morningstar Analysts, delivered 0.88% year-to-date, landing in the top quartile of its category. Veteran manager Philippe Noyard, who has been at the helm since 1999, has maintained an underweight to commodity-related sectors such as basic materials and chemicals, preferring more resilient sectors such as consumer goods; with issuers such as French frozen foods group Picard, telecoms; Altice, Telefonica, and healthcare.
This caution paid off in this year’s rocky markets, but the fund has also built an attractive track-record over the long term. Over 10 years to the end of September 2015, its annualized return of 5.6% has outpaced the category’s 5%, without excessive risk. The share class available to UK investors did not do as well.
HSBC GIF Euro High Yield Bond, rated Silver by Morningstar Analysts, has fared less well year-to-date with a loss of -1.80% in EUR, which lands behind 80% of its category peers. Manager Philippe Igigabel prefers issuers that he believes are relatively insensitive to the economic environment, either because of their business model or the soundness of their fundamentals.
For the past five years, he has thus maintained a significant overweight in subordinate financial debt as he was convinced by banks’ and insurers’ efforts to clean up their balance sheets after the credit crisis of 2008. He has also increased exposure to the junior debt of non-financial issuers, called “hybrid” bonds, which made up 24% of assets in September 2015, compared to 14% a year before.
This positioning has held the fund back this year as market volatility took its toll on many hybrid bonds during the sell-off; EDF and Volkswagen were amongst the worst performers in the second quarter of 2015. Nevertheless, the manager remains comfortable with this positioning, and took advantage of the market dip to increase his exposure to certain hybrids.
Such moves are a testament to the contrarian flavour of the approach, which in spite of short-term weakness, has worked very well for investors over the long term. Over 10 years to the end of September 2015, the fund’s 6.5% annualised return outpaces 84% of competitor funds, with a lower level of risk.
