We are conscious of the rising risks represented by the Italian election result (demonstrating the increasing influence of populist politics as the electorate rail against the austerity approach) and the on-going saga in Cyprus, which again threatens to undermine the credibility of eurozone officials as they continue to adopt a case-by-case approach to each new crisis. Whether Cypriot authorities insist on a levy on depositors or not, it shows that in a weak banking system with a weak sovereign, impairments are likely to result. At current market levels, the risk/reward in the eurozone periphery looks considerably less appetising than last summer, whilst investor positioning in credit is longer than it has been for some time.
Therefore, within the Henderson Horizon Euro Corporate Bond Fund we have taken advantage of the recent resilience to trade up in quality, targeting issuers that exhibit defensive characteristics, have demonstrable fundamental improvement, and have more of a global reach (rather than a domestic European focus).
· Quality: securities from ‘core’ countries (evidenced by a sustainable debt position or independent monetary policy), companies that are globally diversified in terms of revenues and that have stable or improving credit rating momentum. Examples include bonds issued by BAT (global tobacco), Amcor (global packaging), and Telstra (Australian telecom).
· Focus on alpha: deleveraging/turnaround stories that apply regardless of market direction or euro crisis. Examples include: Gecina, a property company that is reducing leverage (it was upgraded by both Standard & Poor’s and Moody’s in 4Q12); and GKN, a high yield issuer but with a credible strategy to regain an investment grade rating over the next 12-18 months
· Global: European companies with low exposure to domestic Europe, and/or international companies issuing in euro
Our expectation is that good stock selection (alpha) will be more important than beta in driving returns in 2013.
