Courtesy photo. Deutsche AM appoints Petra Pflaum as CIO for Responsible Investments
Deutsche Asset Management has announced the appointment of Petra Pflaum as Chief Investment Officer for Responsible Investments, effective immediately.
In this new role, Pflaum will manage a dedicated Environmental, Social and Governance (ESG) team responsible for the further integration of Deutsche AM’s ESG capabilities into its investment processes and growing its client offerings across its Active, Alternatives and Passive businesses. The existing ESG thematicresearch and governance teams will report to her.
Pflaum will continue in her role as EMEA Head of Equities for Deutsche AM, and will be joined by Britta Weidenbach who will become EMEA Co-Head of Equities effective immediately. Pflaum will also become a member of the Management Board of Deutsche Asset Management Investment GmbH representing Deutsche AM’s Equity and Equity Trading businesses.
Pflaum joined Deutsche AM in 1999, and prior to her current role served as Co-Head of Global Research and Global Head of Small & Mid Cap Equities. Weidenbach is currently Head of European Equities and has also been with Deutsche AM since 1999. She has managed European equity funds since 2001.
Nicolas Moreau, Head of Deutsche Asset Management and Member of the Deutsche Bank Management Board, said: “Deutsche AM has recognised the importance of ESG within its investment approach for many years. We are proud to have been amongst the early signatories to the UN supported Principles for Responsible Investment (PRI) in 2008. It is important we build on this heritage, and use our expertise to help clients who want support in this important investment area.”
“I am delighted that someone of Petra Pflaum’s capabilities will take on this important position as CIO for Responsible Investments and member of the Management Board for Deutsche Asset Management Investment GmbH, and that Britta Weidenbach will join her as EMEA Co-Head of Equities. Both are outstanding talents who have held a number of leadership roles over many years within Deutsche AM.
Pixabay CC0 Public Domain. A Mixed Bag, Not A Game Changer
In recent weeks, the market has been abuzz with talk about a rotation in the equity markets from more defensive sectors like utilities, REITS and large-cap multinationals to “riskier,” cyclical sectors. While a rotation is clearly underway, I question the durability of the current trend.
This rotation began in September, when economic data began to confirm an upturn in the pace of US growth, and picked up after the US presidential election. The election gave the market a shot of adrenalin, with investors anticipating lower taxes, less onerous government regulations and a significant increase in infrastructure spending, which theoretically should improve the pace of economic growth. In the post-election environment, beaten-down, lower quality sectors such as banks and industrials — owing to higher debt levels and less-certain cash flow generation abilities — took on market leadership roles.
Let’s put the recent price action into context. Historically, there is a bias for stocks to rise in the fourth quarter of the year, the so-called “Santa Claus” rally. In addition, stocks tend to rise for three to four months immediately following the quadrennial US presidential elections. However, the rotation we are seeing from growth to value this year is atypical.
Sustainably in question
Given all the buzz, it is natural to ask if the so-called Trump rally is sustainable. I doubt it. Here are a few reasons why:
Hedge funds, which have on average badly underperformed their benchmarks in recent years, have been largely responsible for the much of the recent market movement, stepping on the gas in an attempt to improve their performance figures and setting off a highly leveraged momentum-driven trade into cyclicals and riskier companies.
Day traders are back in force. After sitting out much of the nearly seven-year-old bull market, day trading volumes have increased substantially in recent weeks, lately exceeding institutional volume, according to trading volumes reported by discount brokers.
Retail participation has picked up too. That tends to be a late-cycle phenomenon, as the average investor tends to buy during periods of euphoria and sell during times of despair.
The recent modest earnings rebound witnessed in the third quarter is unlikely to last. Higher energy prices, the dramatically strengthening dollar and rising interest rates are all headwinds to earnings and economic growth. These factors could work to offset any fiscal stimulus from Washington next year. Plus, given the advanced age of the present business cycle, history suggests that it would be prudent to expect a potential recession at some point during Trump’s first term.
Beware of narratives
Market narratives can be powerful, but they can also be misleading. Recall the narrative in early 2009, at the trough of the global financial crisis. The economy was too fragile and the financial system was under too much strain. It was thought that in such an environment earnings growth going forward would be anemic, if not impossible. Investors ran scared and many did not return until recently.
That was precisely the wrong approach. Had investors looked past the gloom, they would have realized that policymakers around the world were making an extraordinary effort to heal financial markets and economies. And heal them they did. We experienced incredible earnings growth as markets recovered from the crisis.
Now, years later, the narrative is somewhat euphoric. But I was skeptical of the negative narrative after the crisis, and I am skeptical of today’s euphoria. And euphoria is often a late-cycle phenomenon.
In my view, it is important to keep an eye on several inhibitors to growth that could prove the euphoric market narrative premature, if not wrong. The global economy continues to face a mountain of debt, and depending on the policy mix embraced by the new administration, that mountain could grow more quickly. We face the substantial demographic challenge of an aging, less productive work force.
While lower personal and corporate taxes and a boost to infrastructure spending will likely be accelerants to growth, they are not enough, in my view, to offset the factors that have constrained both US and global GDP for nearly a decade. Perhaps government actions will extend the present cycle for a while longer, but it is unlikely to shift it into a higher gear. For example, given the recent experience with tumbling energy prices, it is unclear that tax cuts will lead to increased consumption. The so-called energy dividend ended up being spent on things like health care rather than on other goods and services. Tax cuts will likely be treated similarly, in my view.
Quality wins in the end
To be sure, some of the recent rotation makes good sense and will likely endure. Bank stocks are likely beneficiaries of a looser regulatory regime and higher interest rates that fatten net interest margins. Energy companies, particularly coal producers, will like find life easier in the new environment.
In my view, what lays ahead is a mixed bag, but not a game changer. I do not see a dramatic uptick in economic growth from the new administration’s policies. Against this backdrop, I continue to prefer high-quality companies with track records of solid cash flow growth, strong balance sheets and high returns on equity. They have a long history of beating market averages over time. I think they will still win out in the long run.
CC-BY-SA-2.0, FlickrPhoto: Steve Snodgrass
. Let’s Stick To The Knitting
Sometimes politics influences economic factors, sometimes it does not. Former President Ronald Reagan was a great champion of supply-side economics, using the work of leading economists such as Friedrich Hayek to provide theoretical justifications for his political actions. But I have to admit to a sense of frustration that has been growing steadily all year whenever anyone starts to talk to me in the workplace about politics.
Remind me, at what point did we all become self-styled experts, ready to voice our opinions on issues ranging from Brexit, Trump, the Italian referendum, and the likely fortunes of Marine Le Pen in next spring’s French presidential elections? At what point did stock market chatter over corporate earnings, valuation multiples, and a hearty debate on a company’s outlook make way for the latest opinion-poll gazing?
Up until very recently, when Mariano Rajoy was returned as prime minister of Spain, the country was without a government for over 10 months. In that time, Spanish GDP growth did not stop, registering 0.8% in the first two quarters of 2016 and marginally lower growth of 0.7% in the third quarter. A prime example, if ever there was one, of there often being no link whatsoever between politics and economics.
Nor is the correlation between underlying economic growth and the performance of equities clear-cut. A company’s earnings are not analogous to GDP growth. Just because an economy is doing well, or badly, does not necessarily mean stock markets should follow the same fortunes.
Just to reinforce the point when looking at smaller companies, here’s how it works in practice. The profitability of Prosegur, the Spanish securities and cash management business, is dependent on the growth in the European alarm market and the cash-in-transit market in Latin America. Revenues for another Spanish group, Viscofan, the sausage skin casings’ manufacturer, are driven solely by the global demand for protein. Get the picture?
Irrespective of the economic landscape, our investment strategy, a blend of value and growth styles, favours companies benefiting from structural growth situations, turnaround positions and cyclical businesses; admittedly the latter are more related to the fortunes of the economy.
A good example of the structural growth theme is in the area of European outsourcing. Large companies, constrained by red tape, have achieved greater flexibility using this method across a wide range of industries, including IT, engineering, software and automotive systems.
Turnaround situations are a particular feature of European building material manufacturers. An industry known for its operational gearing, companies have continued to pare down costs since the global financial crisis. When sales eventually reach levels more akin to their long-term average, bottom line growth should be significant.
At the start of each year analysts tend to start with optimistic forecasts for European earnings growth, only for them to be continuously downgraded in subsequent months. So when I say that growth for European smaller companies for 2017 should be around mid-teens, colleagues start to look sceptical.
But here’s the mathematics. Rising employment is continuing to propel the eurozone region towards 2% growth. Add 1% inflation, the effect of prior year acquisitions, and the general growth premium of smaller companies gets us to around 6% revenue growth. Then add in falling input costs, some acquisition benefits and a dollop of operational gearing and there you have it. An asset class which, despite all the political shenanigans going on around it, is managing decent growth.
So, next time you are tempted to talk politics, opinion polls, and the vagaries of the US Electoral College system, try restraining yourself, however tempting. No one knows how key political events are going to transpire, just as much as no one knows what the stock market’s reaction to those events is likely to be. As investors, let’s try to stick to the knitting and focus on company fundamentals.
Ian Ormiston is a manager, Old Mutual Europe (ex-UK) Smaller Companies Fund.
. Pioneer: 'In China we still see a more stable overall picture than in other emerging markets’
Yerlan Syzdykov, head of fixed income and high yield strategies for emerging markets at Pioneer Investments, explains in this interview his vision for emerging debt in the coming year and the reasons why his team rather invest in Asia over Latin America.
What is your outlook for Emerging Markets Debt for 2017?
We are forecasting a pickup in growth in Emerging Markets in 2017. However, of course, the outlook from the returns perspective could be influenced by what’s happening in the U.S., given that interest rates have started to move upwards and that could really add pressure in terms of real returns. So, we think we are looking at low positive returns from emerging markets, and we believe that we are probably going to see flat performance in terms of local currency.
Within Emerging Markets Debt, will Government or Credit market be more interesting next year?
They are going to be broadly the same in terms of performance, by our estimates. We still have a preference for government debt next year. We believe that there is a little bit of inertia in terms of growth that will still put pressure on corporates. Higher refinancing rates are probably something that we need to be aware of in 2017 and 2018. So, we are looking at the higher default rates that we are forecasting for corporates compared to sovereigns and therefore, our preference is with sovereign debt.
How does the outcome of the U.S. elections affect Emerging Markets Debt?
We are all used to watching the monetary policy of the U.S. as it so important for us. Now, we are starting to see a shift in fiscal policy, in foreign policy and potentially also in trade policy. That could potentially have a negative impact on emerging markets in the long run. However, of course, we need to see how urgent those changes could be and what shape they will take. So, overall, we are going to be monitoring those changes and readjusting our positioning accordingly.
What regions could provide the most interesting opportunities in 2017?
We still see the opportunity to grow in Asia given the structural reforms that we have seen in countries like India and even in China, which are still supporting a good growth story. We are seeing more volatility in Latin America as we are witnessing the impact of lower commodity prices potentially, especially in metals (at least initially). We are also looking very carefully at the negative credit re-rating cycle in Eastern European markets, which would also be affected by political volatility in Europe itself. Therefore, we prefer Asia.
What’s your view on China’s economy and leverage levels?
We have seen some investors getting worried given the 20% growth in leverage levels just to sustain that level of growth. We are looking for some more structural reforms, especially in state-owned enterprises (SOEs), something that has not really happened yet, and we are probably going to see a bit of a slowdown in that structural reform drive given that the beginning of the political succession in China. So, therefore, Chinese growth may underperform somewhat, but we still see a very healthy and more stable overall picture compared to other spaces in Emerging Markets.
What is your view on EM currencies?
Although we see a pickup in growth in the emerging world, the differential between emerging markets and developed markets is still shrinking, especially if we are looking at the prospect of higher U.S. growth next year and lower productivity growth in the emerging world going forward. That means that currencies are probably not going to be appreciating strongly against the U.S. dollar – we are moving into a strong dollar world if the reforms in the U.S. are going to take place. Therefore, there is probably going to be a little bit of upside in dollar versus emerging currencies so we will be very cautiously positioned in local currencies this year.
Pixabay CC0 Public Domain. The Impact of Brexit on Hedge Funds: Year - End 2016 Update
Preqin’s year-end update on attitudes to Brexit in the hedge fund industry has found that managers have become more upbeat about the result in the intervening five months. As the majority of fund managers believed the UK would vote to remain in the UK (71%), it is unsurprising that a large proportion were caught out by the immediate market turbulence. In July, 34% of firms thought Brexit had negatively impacted their performance in the aftermath of the vote, although 27% managed to capture this volatility and boost returns.
Since then, managers have been able to navigate the market more adeptly, despite the vote still considerably affecting performance. In November, just 21% of firms have seen a negative impact from Brexit over H2, while 32% have seen their performance affected positively. Going forwards, a quarter of hedge fund managers expect the impact of Brexit to be positive for their portfolios, and now the industry has an opportunity to prove its value in generating non-correlated returns. Investor confidence in the UK also seems to have returned since the referendum.
Immediately after the referendum, 31% of hedge fund investors expected to invest less in the UK over the next 12 months, and 24% expected to invest less in the longer term. As of November, those proportions have fallen to 21% and 18% respectively, while the proportion looking to invest more in the UK over the coming year has risen from 7% in July to 13% currently.
Other Key Facts on the Impact of Brexit on Hedge Funds:
Performance Recovery: UK-and Europe- focused hedge funds incurred steep losses in June 2016, immediately following the referendum result. However, both have more that recovered those losses in Q3, and as of the end of October are showing YTD gains of 1.91% and 0.99% respectively.
Business as Usual: The majority of investors do not think Brexit will alter their hedge fund commitments in either the EU or the UK. Three-quarters of investors plan to invest at the same level in the UK over the long term, while 81% of investors will maintain their current level of investment in EU-based hedge funds.
Fund Manager Location: Although the majority (70%) of UK-based hedge fund managers surveyed in November do not anticipate changing location, this proportion has shrunk since July (80%). Meanwhile, a greater proportion of firms (24%) are now uncertain of their position compared to five months ago (17%).
Firms and Investors: The UK is still home to the majority of hedge fund industry participants. Preqin tracks 944 EU-based hedge fund managers of which 590 (63%) are headquartered in the UK, and 757 EU-based investors of which 408 (54%) are located in the UK.
Size of EU Industry: As of 30th September 2016, the UK hedge fund industry dwarfs that of the rest of the EU market. The UK-based industry currently holds $478bn in assets, while the EU market (minus the UK) is worth $125bn.
You can read the full report in the followig link.
CC-BY-SA-2.0, FlickrPhoto: Anita Ritenour. Challenges in Frontier Markets: Kenya
Global Evolution’s, team visited Kenya in early Dec 16 in order to gauge the degree of likely policy slippage going into mid-2017 elections. The frontier markets experts met with various economic stakeholders including representatives from the Central Bank of Kenya (CBK) and the Finance Ministry. The visit reiterated their extremely constructive longer-term outlook for the economy, but highlighted some potential short-term vulnerabilities:
Growth outlook
Kenya is at an interesting inflection point: the combination of the new SGR railway between Mombasa and Nairobi and improved energy production should enable the development of an industrial corridor along its route. A shift into light manufacturing will have a major impact on the structure of the economy. Meanwhile, GDP growth was around 6.2% y/y in Q2:16 compared to 5.9% y/y in Q2:15
Political risk
Kenya has elections on 8 Aug 17 and it is likely that the government’s focus will increasingly look towards political gain rather than policy changes in the interim. It is likely that Kenyatta and his National Alliance will win the elections unless the so called National Super Alliance (NASA) which is being spearheaded by ANC leader Musalia Mudavadi is successful in getting agreement between Mudavadi and ODM leader Raila Odinga as to who will lead the party. They suspect an Odinga leadership is unlikely to unseat Kenyatta: a Mudavadi leadership just might.
As with the previous election, which saw limited security issues, the sense is that politicians will be more constrained in whipping up violent ethnic sentiment for political gain during the campaigning for next year’s elections.
The election is becoming more of a focus for policy decisions. In particular, the private members legislation on fixing interest rates, which was unanimously supported in parliament despite being opposed by the executive, is unlikely to be overturned or amended prior to the elections.
Monetary policy
The CBK has a problem. In late Aug 16 parliament unanimously passed a bill capping the spread on interest rates around the CBKs policy rate with a maximum spread of 700 bps. As with all such populist legislation, the rule has created some unwelcome influences. First, it has added to the liquidity pressure being faced by the lower tier banks following the collapse of 3 of them earlier in the year.
Second, it has reduced credit to the private sector as the government is presently financing above the cap intended for private lending. We met several private banks who suggested that once the administration and risk premium is added to private sector clients there was limited value in lending to them, rather than the government.
Third, in order to keep the lower tier banks solvent, the CBK is extending liquidity to them as the interbank market will not at present. This is pulling down the short end of the money market curve and placing upwards pressure on USDKES. Making it relatively cheap to short the KES into an election is always a very dangerous monetary policy move.
To some extent the CBK is between a rock and a hard place, as it balances the needs of banking sector and currency stability. The result has been a reduction in FX reserves to around USD7.33bn in late Nov 16 from USD7.78bn in late Oct 16. The upwards pressure on USDKES has also drawn the attention of a very maternal CBK who is attempting to micro-manage the FX trading of the major banks. Not surprisingly, most of the banks we spoke with believed that USDKES would grind higher into next year’s elections, although none saw an extended or aggressive sell-off.
Inflation appears to have found a bit of a bottom around 5.0% y/y in Q2:16 and has been drifted up again to 6.7% y/y in Nov 16. With a 3-6% inflation range target the move limits the room for the CBK to further cut rates, at least for now. Interestingly, despite policy rates likely remaining on hold, the bid from commercial banks for government paper created by the new interest rate spread legislation will keep fixed income well bid in coming months.
Global Evolution, an asset management firm specialized in emerging and frontier markets sovereign debt, is represented by Capital Strategies in the Americas Region.
Pixabay CC0 Public Domain. La Financière de l’Echiquier Foundation Sets a Course for Europe
After celebrating ten years of engagement in France, La Financière de l’Echiquier Foundation has expanded its reach to promote education and professional integration in Europe, and in that way, support the company’s development beyond its borders.
The Foundation has thus broadened its mission in assisting persons in difficulty to those countries where La Financière de l’Echiquier (LFDE) is already present by supporting non-profit projects promoting access to the world of work. The first three not-for-profits supported are Apprentis d’Auteuil in Switzerland, Rock your life! in Germany and Duo for a job in Belgium, with developments in Spain and Italy next in line.
Ten years of initiatives in France have made it possible to distribute €5 million and finance more than 150 solidarity-based projects. 75% of the Foundation’s budget is derived from fee sharing arrangements for two funds, Echiquier Excelsior and Echiquier Agressor Partage – a pioneer in such sharing mechanisms, for which LFDE was recognized in 2013 and 2014, the “Financial altruist of the year”. The remaining 25% is derived from private donations.
“This expanded European scope marks a new chapter in the history of our foundation,” commented Bénédicte Gueugnier, President of La Financière de l’Echiquier Foundation, adding that “in so doing, it seeks to promote the company’s values and their sustainability in those countries where it has established a presence, beyond its core business. As in France, LFDE employees will be engaged by participating in all these local initiatives.”
“We are happy and proud to deploy with even more energy our philanthropic initiatives wherever we are present. This excellent initiative quite naturally accompanies the latest advances of our project for growth and reinforces our local engagement. I consider myself profoundly European and am determined to replicate at this level the superb work we have carried out in France for more than ten years”, added Didier Le Menestrel, Chairman & CEO of La Financière de l’Echiquier.
CC-BY-SA-2.0, FlickrPhoto: Nikolaj Potanin. US Reflation and Chinese Capital Flight Heighten Emerging Markets Outflows
According to Willem Verhagen, Senior Economist at NN Investment Partners, the most important development in EM recently has been the sharp deterioration in capital flows. After flows had improved in the period February‐June, mainly driven by the more urgent search for yield globally, they started to weaken again in the summer. The specialist notices that from the moment that US yields started to rise, EM outflows have increased. In October, when the pace of the US yield increase accelerated, also EM outflows accelerated. And when the Trump election caused a break‐out in US yields, EM flows reacted immediately: November became one of the worst outflow months on record, with an estimated outflow of USD 124 billion. This compares with USD 122 billion last January, USD 62 billion in June 2013 (Fed tapering fear) and USD 218 billion in October 2008. Large capital outflows lead to a tightening of financial conditions and a slowdown in economic growth.
In his opinion, one can distinguish two main factors that explain the increasing capital outflows. Firstly, the serious headwinds to the global search for yield due to the market excitement about US reflation. Given the huge inflows into EM debt markets in the past years (despite deteriorating EM fundamentals!), we should be worried that outflows can continue for a while and can get nastier.
And secondly, Chinese outflows have been accelerating in the past months, not so much because global money is leaving China. But it is Chinese households and corporates that are taking more capital offshore, despite tightened regulation by the authorities in Beijing. An important role plays the continuous depreciation of the renminbi versus the US dollar, that is making Chinese people with money more nervous. “The depreciation of the renminbi is likely to continue, due to the US reflation expectations and due to the dramatic rise in leverage and the sharp money supply growth with only a limited impact on Chinese growth. In the background remains the threat of US protectionism, that potentially can push the Chinese currency much weaker.” Verhagen concludes.
Pixabay CC0 Public DomainPhoto: AnaGuzzo, Flickr, Creative Commons.. Spain Is Open for Business: Politics Aside, Spain Offers an Appetizing Opportunity for Investors
2016 has been a tough year for Spain. After two elections and 10 months without a government, the center-right People’s Party, led by Mariano Rajoy, was finally able to grab the reins of power, albeit without a majority of seats in parliament. Another election could be in the offing as early as May. Beneath the political tumult, however, the economy is quietly humming along. The IMF has lifted its estimate of Spain’s economic growth to 3.1 percent for 2016, making it the envy of the developed world.
The recovering economy, which is playing catch-up after a deep recession brought on by the 2008 financial crisis, has given a strong boost to Spain’s private equity market. The country saw a record 72 private equity deals in 2015, totaling $2 billion, according to research service Preqin.
But while the number of deals hit an all-time high, the dollar volume was the lowest in five years, reflecting a shift in private equity investment to small and medium-size enterprises. It’s those companies that now provide the most inviting growth opportunities.
Investors are starting to pay attention. A record 1.27 billion euros was raised in nine private equity fund closings in 2015, according to Preqin. Spain now has 25 private equity funds with a combined 3.6 billion euros of targeted capital.
Still, the market is small compared to its potential, with those 3.6 billion euros accounting for just 0.3 percent of Spain’s gross domestic product (GDP). That compares to $1.34 trillion in the US, or roughly 7 percent of GDP.
So where are the most promising private equity investments? The list starts with disruptive companies that are bringing new products and new ways of doing things, of which Spain has its fair share.
The companies that are most likely to be disruptive are the smaller and more agile firms. In addition to their growth prospects, smaller firms often offer more attractive valuations than their larger brethren and there is often less competition among investment funds to garner a stake in these companies.
The sectors of the Spanish economy with this kind of appeal include telecommunications, transportation, medical technology, biotechnology, education and real estate.
When it comes to telecommunications, I see opportunities in young companies providing services that complement traditional offerings from telecom, cable and satellite incumbents.
On the medical technology front, two overriding factors are driving innovation in the provision of healthcare services. First is the issue of rising costs for medical care. Second is a concern for patient safety. Technology plays a key role in both areas.
Recent examples of private equity investments in disruptive small- and medium-size Spanish enterprises include the following
· GPF Capital acquired a majority share of telecommunications company Acuntia, which engages in the design, integration and maintenance of communication networks, including network architecture, video collaboration, security and mobility, and data centers;
· Magnum Capital took an equity stake in Orliman, a manufacturer and distributor of non-invasive orthopedic devices for the limbs and torso, with its products being used in the prevention of injury, treatment of chronic conditions and for recovery after surgery or injury; and
· Eneas Alternatives Investments, of which I am a partner, acquired control of Lug Healthcare Technology, a medical technology company that has developed a unique error-free process to manage the prescription, administration and inventory of single-dose drugs in hospitals.
Spain is full of similar disruptive companies in growing industries. Many of these companies are starved for capital after a prolonged recession. And there is far less competition among private equity firms in Spain than in the US.
Combine that with the fact that its population of nearly 50 million is well-educated and larger than California’s, that its $1.4 trillion GDP is the fourth largest in Europe, that it’s home to some of the world’s top-ranked business schools, and you have an attractive playing field for private equity.
As my partners and I have discovered, Spain is most definitely open for business.
Opinion column by Ed Morata, partner and co-founder of Eneas Alternative Investments.
Pixabay CC0 Public DomainPhoto: Milivanilly. AXA IM Launches Fixed Term High Yield Bond Portfolio: AXA IM Maturity 2022
AXA Investment Managers(AXA IM) announces the launch of AXA IM Maturity 2022, a fixed term bond portfolio primarily invested in US high yield bonds, managed by Pepper Whitbeck, Head of US Fixed Income and Head of US High Yield at AXA IM.
“In this slow growth, low interest rate environment, we believe that active portfolio managers in the US high yield asset class may deliver mid-to-high single digit annualized returns by collecting coupons and avoiding defaults. US high yield offers a diverse, dynamic and liquid investment market. At almost two trillion dollars in size, the US high yield market is significantly larger than the European high yield market, with over 1,000 high yield companies across a wide variety of industries”, said Pepper Whitbeck.
“It is almost impossible to time the market, so this portfolio, which has a predetermined investment period, may help to alleviate investor concerns by mitigating market and interest rate risks. For example, by staying invested for the full five-year investment period, investors can pay less attention to the interim price movements. The portfolio is designed to be held through the predetermined investment period,” he added.
“For investors looking for yield, this has been a challenging environment, however the US high yield market has been delivering so far. We seek to combine finding yield with a prudent approach towards credit selection. We aim to avoid speculative bonds in the portfolio in an attempt to take risks that we can analyze and manage. Our focus is firmly on avoiding defaults.”
The portfolio manager takes a “buy and monitor” approach, intending to hold the securities for five years, the predetermined investment period. The team will build a diversified portfolio of US high yield bonds at the beginning of the term, investing in names that in their view have solid business fundamentals. A strict sell discipline is applied to any position if an issuer’s credit fundamentals deteriorate.
This “buy and monitor” approach aims to maximize yield in a cost-effective manner by minimizing turnover and therefore transaction costs. At the end of the predetermined investment period, the portfolio will self-liquidate — all bonds will either be repaid or sold.
AXA IM is one of the largest managers of US high yield bond portfolios. The team, consisting of 13 US high yield specialists based in Greenwich, CT, currently manages over US$ 27 billion.
