Photo: R. Nial Bradshaw. Why High-Yield Bonds Are Compelling Now?
High-yield bonds occupy a special niche within the fixed-income market. These bonds, which are issued by companies with below-investment-grade credit ratings, offer higher yields to compensate investors for accepting exposure to additional credit risk. Generally, the lower the bond rating, the higher the yield.
Traditionally, companies with poorer credit ratings have issued high-yield debt to finance mergers or buyouts to help meet expanding capital needs. However, in recent years, more high-yield bonds have been issued to refinance existing debt. Companies have taken advantage of low interest rates and investors’ increased appetite for higher-yielding income investments to lock in relatively cheap financing. Situations where companies refinance their debt at more favorable rates generally put them in better financial health. Consequently, they tend to involve significantly less risk of default.
High-yield bonds are atractive to a wide range of investors because of their unique set of attributes. They appeal to investors who seek equity-like returns at much lower volatility levels than equities and to those who seek income with relatively low interest-rate sensitivity.
For the past five years, the high-yield market generally has been improving. These are, for Eaton Vance, four reasons to invest now in high-yield:
1. Low default rates.
The default rate has been below 2% in each calendar year since 2010, and as low as 0.6% in 2013 and early 2014, before rising to 2.0% with the default of TXU, a large high-yield bond issuer. This compares very favorably to the
10.3% default rate that was briefly reached in 2009, in the early aftermath of the credit crisis. It also stands well relative to the asset class’s long-term average default rate of 3.9%.
2. Healthy balance sheets.
Corporate balance sheets of below-investment-grade firms are generally in good shape and likely to improve as the economy gradually continues to recover.
3. Higher-quality issues.
The quality of new high-yield bond issues has been relatively good for several years, with 56% of issues currently being used to refinance debt, which is generally a positive scenario, bolstering company financial health. Conversely, fewer high-yield bonds being issued are lower-rated or being used to finance acquisitions and buyouts.
4. Low leverage
Another positive trend is that the leverage ratio of debt to EBITDA now stands at around 4, which is roughly where it’s been for about four years after peaking at about 5.2 in mid-2009. This is a reflection of the diligent work by many corporations to strengthen their balance sheets as well as more prudent stances taken by financial institutions and by investors in general.
With all that said, it is important to be mindful of market changes and the risks of deteriorating credit standards as the credit cycle changes at some point. For instance, a rise in the issuance of CCC-rated lower-quality debt could be a warning that the credit cycle is nearing an end. These riskier bonds tend to accompany an upswing in aggressive leveraged buyouts and indicate an increase in the high-yield market’s overall risk exposure.
Eaton Vance is mindful of quality within the high-yield market and the importance of being compensated appropriately or sufficiently for higher levels of risk. If yields are only rising incrementally for much higher levels of risk, it may be wise to pass rather than take on higher or excess levels of risk. “In brief: Ask if you are being paid appropriately or if risk is being appropriately priced“, said the firm.
Patrice Dussol, Responsible for Spain and LatAm. The Oddo Group Gives Rise to Oddo Meriten Asset Management
Following BaFin’s approval in Germany, Oddo & Cie has closed the acquisition of Meriten Investment Management. Together with Oddo Asset Management, the newly formed asset manager will be named Oddo Meriten Asset Management. With €45bn assets under management, the Franco-German player becomes a Eurozone’s independent asset manager leader. The Oddo Group confirms its expansion on the German market as well as its long term commitment to the asset management industry.
The Franco-German DNA of Oddo Meriten Asset Management translates into its current clients’ geographic breakdown: 55% in Germany, 37% in France, 8% in other markets of which globally 76% are institutional investors and 24% are third-party distributors.
The two key investment centers and geographical pillars of Oddo Meriten Asset Management are Paris and Düsseldorf with additional distribution offices in Milan, Geneva and Singapore. The two legal entities in France and Germany will be led as before by Nicolas Chaput and Werner Taiber. Nicolas Chaput becomes Global CEO and co-CIO of Oddo Meriten Asset Management while Werner Taiber, based in Düsseldorf, becomes Global Deputy CEO in charge of Sales Development.
Oddo Meriten Asset Management, a specialist focused on European markets, enhances its investment capabilites on all main asset classes. As of today, assets under management breakdown as follows: €17bn in Fixed Income, €8bn in Equities, €9bn in Asset Allocation, €2bn in Convertibles Bonds, €6bn in Systematic Strategies and other €3bn.
“Our existing clients will benefit from our enhanced combined capabilities. Our German institutional clients will be offered access to convertible bonds and fundamental European Equities expertises. As for our French and international institutional clients, they will get access to corporate Investment Grade and High Yield, Euro Aggregate capabilities as well as quantitative strategies (Trend Dynamics, Quandus). On the German Wholesale and IFA side, clients will benefit from a targeted mutual fund range, focused on asset allocation (Oddo Patrimoine, Oddo ProActif Europe, Oddo Optimal Income) and European stock picking (Oddo Génération, Oddo Avenir Europe, thematic funds on real estate and banks)”, according to the firm.
Oddo Meriten Asset Management’s 276 employees are committed to ensure continuity of client satisfaction.
Philippe Oddo, Managing Partner of Oddo Group says: “We are pleased to welcome our Düsseldorf colleagues. Thanks to them we are creating a Franco-German group. 25% of our revenues and teams are from now in Germany. Oddo’s partnership will be opened to Meriten’s talents. We want to continue to retain and to attract the best people.”
“Our unmatched understanding of French and German markets will enable us to bring a unique set of European investment solutions to our clients”, says Nicolas Chaput. “This is a major change of dimension, as we have become one of the top independent players in the Eurozone. We are committed to provide sustained top notch performance to our clients and to keep investing into proprietary fundamental and quantitative research.”
“The merger of Oddo Asset Management and Meriten Investment Management ensures the consistency in our investment approach as well as the continuity with our clients in Germany and abroad. In addition it supports our ambition to further grow the business with existing and new clients,” says Werner Taiber.
Photo: Garry Knight. Columbia Threadneedle Investments Grows UK Equities Team
Columbia Threadneedle Investments has appointed Jeremy Smith to the new role of Head of UK Equity Research. He joins in September to lead the UK research team and further develop Columbia Threadneedle’s UK equity research capabilities. His appointment follows that of new analyst recruits Phil Macartney and Sonal Sagar.
Jeremy will be based in London and will report to Leigh Harrison, Head of Equities, Europe. He joins from Liberum Capital where he was part of the Equities Sales team. He has 23 years of experience and has held various roles in asset management including Head of UK Equities at Neptune Investment Management and Director in the UK large cap team at Schroders.
Leigh Harrison, Head of Equities, Europe, said: “Jeremy’s appointment comes at a fantastic time. We have been experiencing great success across the product range; with our UK and European funds AUM at record highs this year and the UK Absolute Alpha Fund reaching £500m this month. Active management and insight are a key part of our ability to deliver successful outcomes for our clients and Jeremy’s strong track record and extensive experience will further enhance our client proposition.”
Jeremy’s appointment follows Mark Nicholls who joined the European Equity team as a Portfolio Manager in May this year. Phil Macartney joined the UK Equity team in March 2015 from Bramshott Capital where he was a senior equity analyst and Sonal Sagar also joined the UK Equity team in May 2015 from Jefferies International where she was an equity research analyst. Phil has eight years and Sonar has nine years of investment experience.
Photo: Flickr. Chinese Volatility Provides Longer-Term Buying Opportunities
The huge decline of Chinese equities is a sign of increasing market volatility rather than the start of a bigger correction, argues Lukas Daalder, Chief Investment Officer for Robeco’s Investment Solutions.
Signs that China’s economic slowdown is deepening have sent the Shanghai Composite Index to its biggest one-day percentage loss in eight years. The index closed down 8.5% on Monday. The decline was partly a reaction to the publication of the preliminary Caixin/Markit China Manufacturing Purchasing Manager’s Index (PMI). This leading indicator declined from 47.8 in July to 47.1 in August, the lowest level since March 2009.
“The shift from an export- and investment-driven economy to a model which is driven by local consumption is a bumpy ride,” says Daalder. “The disappointing PMI report is the newest piece of a growing pile of evidence that the cracks in the Chinese economy are bigger than most investors anticipated. The stock market was already shaken by the sudden depreciation of the renminbi two weeks ago and this is a new shock.”
In a reaction to the falling markets, China has allowed pension funds managed by local governments to invest up to 30% of their net assets in stocks and equity funds. Chinese state media has calculated that this will theoretically allow USD 97 billion to flow into the stock market. “Local governments tend to react quite quickly to this kind of change in legislation”, says Daalder. “We expect China to take additional steps if they are needed for equity markets to calm down. Even a new deprecation of the renminbi cannot be ruled out.”
A difficult choice
Daalder says the Chinese government faces a difficult choice if its current actions fail to create a more stable market climate. “Additional interventions might provide some stability, but that would mark a step back in the shift to a more market driven model,” he says. “It is also a dangerous precedent, for investors have a tendency to get addicted to government support for financial markets quite quickly. On the other hand, without intervention the current panic might lead to a decline of 20%.”
According to Daalder, the base scenario is that the decline in Chinese equity markets is a sign of increasing market volatility rather than the start of a large correction: “Global equity markets have had a steady run-up during the last couple of years, which was not always supported by an improving economy. We have already warned investors that they should prepare themselves for larger price movements and growing uncertainty.”
The effects of the correction on the Chinese stock market are also being felt in different regions and among other asset classes. “China has become an essential part of the world economy,” says Daalder: “The fear of an economic slowdown is putting huge pressure on commodity prices. The oil price has fallen to its lowest level in more than seven years. A correction in commodity prices usually spells bad news for emerging markets.”
Correction creates buying-opportunities
“Financial markets are already quite edgy and in this climate, investors tend to overreact to bad news,” explains Daalder: “As long-term investors, we are plotting the market to see if the price declines are creating buying opportunities in some markets. The correction in the high yield-market illustrates that investors are already bracing themselves for a sharp increase in defaults, anticipating that a lot of shale companies will not be able to survive the collapse in the oil price. There is a good chance that the market is overshooting with this price reaction.”
Another effect of the panic in Chinese equity markets is a possible delay of an interest rate hike in the United States, explains Daalder. “The Federal Reserve has been communicating to financial markets that it intends to raise interest rates in September,” he says. If the markets do not calm down, they might decide to hold off raising interest rates until December. All in all, although the turmoil may continue for some time to come, we are looking at it as a longer-term buying opportunity”.
Photo: BlackRock’s BGF Global Multi-Asset Income Fund portfolio manager, Michael Fredericks. BlackRock: "We Must Begin To Look Beyond The Traditional Income Generating Assets”
Today’s markets have largely been characterized by increasing market volatility coming from diverging global monetary policy and macroeconomic uncertainty. In addition, future return expectations across risk assets are more modest than in previous years, causing investors to have to rethink their overall investment strategy.
In this market environment it is very difficult to find assets which generate income while “keeping the risk at bay,” which is one of the obsessions of BlackRock’s BGF Global Multi-Asset Income Fund portfolio manager, Michael Fredericks. The company’s expert is convinced that flexibility and the ability to search for assets beyond traditional income-generating sectors will be a key element for the future, and the market is beginning to realize this.
Proof of this is that traditional income-oriented investments, such as dividend paying equities and high yield bonds, have seen significant inflow in recent years and are beginning to be overvalued. It’s time to look elsewhere.
The strategy, with five star Morningstar rating, has the flexibility to invest across a wide variety of income-producing asset classes, with no regional constraints. “Non-traditional income asset classes such as Master Limited Partnerships (MLPs), Real Estate Investment Trusts (REITs), Preferred Stock, Floating Rate Loans and Emerging Market Debt are often more difficult for individual investors to access yet can offer attractive diversification within a broader income portfolio.”
In addition to derivatives, BlackRock’s Global Multi-Asset Income Fund uses covered call options, “which are very attractive in a low interest rate and low returns environment,” Fredericks said. “In particular, we favor an approach that focuses on writing calls on individual securities rather than on an index as this offers more attractive opportunities to take advantage of market and individual stock volatility. We prefer short maturities, typically writing calls with maturities between 1-3 months, and write options that are on average 5-8% out-of-the-money which allow us to capture 5-8% upside potential on the underlying stock. We believe this approach provides the best risk-adjusted income and return opportunities for our investors.”
For Fredericks, it’s a fact that equities offer attractive value in this environment relative to credit. However, he reminds us that, “it is important to consider an investor’s risk tolerance when increasing an allocation to stocks. While valuations across most stock and bond sectors are at or near elevated levels, we do still think there are opportunities for attractive risk-adjusted yield opportunities, though investors need to tame their expectations for returns. Specific to credit, we believe current spread levels offer investors attractive opportunities for income, but we do not expect significant appreciation above and beyond the coupon from these securities.”
BlackRock’s BGF Global Multi-Asset Income Fund currently has a large percentage of assets invested within the US, mainly in fixed income. “. With bond yields at historic lows across the globe, we have favored exposure to U.S. credit sectors that offer attractive levels of income and ample liquidity,” adds the portfolio manager. However, when talking about the equity portion in the portfolio, Fredericks prefers to avoid the US market and opts for Europe or Japan. The reason is obvious: “quantitative easing programs offer an attractive backdrop for companies with greater exposure to those regions.”
While it’s true that fixed income is starting to look less expensive after a recent increase in yields, the expert from BlackRock, however, heightened volatility within bonds and believe a more tactical approach is necessary during these markets. “We currently favor corporate bonds (both investment grade and below investment grade) over government debt and also find opportunities within the mortgage-backed market, particular commercial mortgage-backed securities and residential non-agency mortgages. Finally, we see value in Preferred Stock, in particular the institutional preferred market which offers attractive income levels but also a fixed-to-floating rate structure which we find attractive amid the possibility of rising interest rates,” he explains.
CC-BY-SA-2.0, FlickrPhoto: Hubert Figuière
. Three Important Things about the European Investment-Grade Fixed Income Market
The European Investment-Grade Fixed income team at Pioneer, lead by Tanguy Le Saout, Head of European Fixed Income, Executive Vice President, talked last week about certain developments in the fixed income markets to keep in mind in the short term:
1. Inflation – Down Down, Deeper and Down
Perhaps the reason that global bonds initially rallied was that the Renminbi (RMB) move was seen as a global deflationary move. A weaker RMB (and other Asian currencies) should mean weaker commodity prices, and lower U.S. and European import prices. However, oil is probably the main driver behind some of the big moves in the inflation markets. This week West Texas Intermediate (WTI) fell to a 6.5 year low. The reason? In our opinion, not so much a lack of demand, but rather a surplus of supply. The International Energy Agency described global oil supply as growing at “breakneck speed”. Coupled with modest demand growth, the situation might suggest further downward pressure on the oil price before a bottom is found. Little wonder then that inflation breakevens globally are falling back towards recent lows. The market appears to be moving away from expecting a pick-up in inflation, to expecting falling inflation again. That could happen in the short-term, but longer-term we believe inflation will move higher.
2. Greece and the ECB – “Hello, Mr Draghi, my old friend”
Former British Prime Minister Edward Heath once remarked that “a week was a long time in politics”. What an apt description for the week that Greek Prime Minister Alex Tsipras has enjoyed. Firstly, encouraging noises are being made about concluding negotiations on a third bail-out package in time to meet the next repayments to the ECB on 20 August. Secondly, the fiscal targets being set in this package appear to be considerably easier than initially suggested. Thirdly, and probably most surprisingly, Greek Q2 2015 GDP was reported as a stronger-than-expected +0.8%, as opposed to consensus expectations for a fall of 0.5%. So it is worth asking exactly when Greek bonds might be eligible for the ECB’s QE bond-buying programme? The ECB would have to reinstate the waiver of the minimum rating criteria for Greek government debt. However, that could come potentially as soon as European Stability Mechanism approval of the first tranche of loans. Could you have imagined back in early July that the ECB might be buying Greek government bonds by the end of 2015? No, us neither.
3. What’s happening to the Swiss Franc?
In all the excitement about the Chinese RMB movements, not much attention is being paid to the recent surprising depreciation of the Swiss Franc. Following the surprise abandonment of the floor against the Euro back in January 2015, the Swiss Franc had settled around the 1.05 level against the Euro. But in the last few weeks, it’s fallen about 4% to a level of 1.09. Perhaps the resolution of the Greek situation has led to some reversal of safe-haven flows. Or maybe, the Swiss National Bank is quietly intervening in the market. And one thing we on the European Fixed Income Investment-Grade Team have noticed is that liquidity is quite scarce in the Swiss Franc, as investors have struggled to understand the Swiss National Bank’s currency policy. Therefore, intervention would have a bigger impact in an illiquid market. Either way, for the moment, it’s a currency that we prefer to watch rather than trade.
Photo: phylevn
. Alternative Investments Grew by 19% Amongst Minority Investors
According to a report published by the Money Management Institute estimating the increase recorded in 2014 at 19%, the popularity of alternative investments is growing rapidly among minority investors, indicating a paradigm shift not seen since the advent of exchange-traded funds in 1993.
Institutional investors have, for a long time, used alternative strategies, a broad category which includes everything from real estate and private equity to hedge funds and private-placement debt, as a vital tool to cover the risk of more traditional long-term strategies, which make up most of their equity portfolios.
But now it’s not just them, but individual investors are also positioning themselves in line with the investment options, especially following the global downturn in the financial markets in 2008. Since then, their focus has expanded beyond shares and bonds, to a world of assets which provide a high level of diversificationnon-correlated with the average ‘Main Street’ portfolio.
Historically, access to these alternative investments was limited to qualified investors, but that barrier is fading, largely because the financial services industry has created vehicles that provide access to alternatives. Thus, mutual funds, with ETFs following closely behind, are currently the most popular vehicles for minority investors.
With a retail market of $ 11.6 trillion in mutual funds, it is not surprising that the financial industry is wildly running to accommodate the growing demand for alternative investment vehicles. Although the amount of $ 139 billion currently included in alternative investment funds is relatively small, that figure has grown steadily over the past five years. Although hedge funds experienced an outflow amounting to $ 6.9 billion in 2013, liquid alternative investment funds gained a further 40 billion during the same period.
Private investors may also gain access to alternative strategies through a network of investment advisors. A large number of private investors already have their own registered investment adviser (RIA) to enter the world of real estate, private placement debt, and direct investments, as well as other alternative strategies. Meanwhile, over 81% of investment advisors are already working with alternative investments for their clients, compared with 74% last year, according to an industry survey.
Prodigy Network, one of the world’s largest Crowd-investing platforms, which invests in Manhattan real estate, is an example of a successful and innovative prospect. The company has successfully raised more than $ 850 million, 30% of which comes from more than 6,200 investors who make up their “crowd”. Together with FlexFunds, an ETPs issuer (Exchange Traded Products), it created a solution that would provide a management and distribution system which would allow investors to participate directly through its investment account.
Another company which fits entirely into the alternative investment category is NXTP Labs, a private investment fund with an accelerated program focused on growing new technology companies with global or regional business in Latin America, which has a strong track record in supporting, accelerating, and selling companies. In its case, it created an ETP, also through FlexFunds, which provides investment advisors with a vehicle, which allows its clients to participate in the direct investment segment of alternative investments.
It seems that, as the alternative investment sector grows, the most innovative platforms, associations, and efficient services, will evolve with them.
Jay Pelham - Courtesy Photo. TotalBank Creates a Private Client Group Headed by Jay Pelham
TotalBank has announced the creation of a new division, Private Client Group, and the appointment of Jay Pelham as its Executive Vice President. Pelham will be responsible for overseeing the Private Client Group division that also houses the Bank’s Total Wealth Management. Private Client Group will also include concierge banking, lending, and wealth management to high-net-worth individuals and professionals.
In his new position, he will also service and enhance existing private client relationships and develop profitable relationships with new clients, targeting professionals and high-net-worth individuals.
Pelham was most recently at Gibraltar Private Bank & Trust as Executive Vice President of Private Banking. He began his financial services career at SunTrust Bank more than 25 years ago in commercial lending, later transitioning to private banking in 2000 as the Private Banking Manager for Miami-Dade County.
Pelham graduated magna cum laude from the University of Tennessee with a bachelor’s degree in economics. He is also a certified financial planner and holds licenses in life, health and variable annuities
Photo: Jean-Marc Stenger, CIO for Alternative Investments at Lyxor, pick up the award in the ceremony. Lyxor AM Wins "Transparency" Award at Distrib Invest’s Ceremony
Lyxor AM won the Transparency award «Les Coupoles» in the “Integrated Financial Groups” category at Distrib Invest’s ceremony, which took place on June 18th in Paris.
The magazine Distrib Invest reward French fund distributors and fund selectors for the quality of their financial reporting.
In its category, Lyxor won this award ahead of La Française and Amundi. “This distinction confirms the success of Lyxor’s strategy, which is based on the quality and transparency of its investment solutions”, said Lyxor.
Jean-Marc Stenger, CIO for Alternative Investments at Lyxor, pick up the award in the ceremony.
Photo: Trey Raatcliff, Flickr, Creative Commons. Renminbi Devaluation: The Impact, Country by Country
China has devaluated its currency, Renminbi. Theses moves shows China is using both domestic (fiscal, monetary) and external (currency) levers to support growth. CNY depreciation will have a negative impact on commodities (given China is the largest consumer) and commodity exporting countries -Indonesia, Malaysia-. If this leads to further easing from other countries, it will be positive for equities, says Mirae Asset.
Impact in China
PBOC’s weakening of CNY may lead to further depreciation, which might not be all negative. “Historically, we have seen currency adjustment as a beneficial tool to boost exports and therefore economic growth”.
However, the risks of currency wars remain. China is in a strong position to defend its currency thanks to it’s large FX reserves and low offshore borrowing. Rather than looking at USD/CNY, China might prevent further appreciation of REER. Emerging Asia constitutes about 20% of China’s total trade, with Europe and Japan accounting for around 40%, according to the experts.
Even if China does want to reverse the appreciation of CNY vs other Asian currencies, it would imply a ~10% depreciation in CNY. On various models, RMB is around 10% overvalued on an average of various frameworks.
“Overall, for the financial sector, we are entering into a lower growth environment, with the asset quality cycle turning and a not-so-conducive operating backdrop. As a result, we maintain an Underweight the financial sector. In such an environment we prefer countries where monetary easing will have the ability to deliver a boost to domestic demand and those with low credit penetration (India, Indonesia, Philippines). Apart from these countries, we continue to like Chinese life insurance companies where protection gap is significant and the industry is showing signs of turnaround for the past 18 months”, says Mirae Asset.
Negative for exporters and ASEAN countries
However on a broader macro perspective, it is negative for exporters to China (or countries with close linkages with China) like Korea, Taiwan, Hong Kong and Singapore. ASEAN may be impacted due to second order effects with their currencies depreciation and reducing the scope of interest rate cuts as currencies remains under pressure.
Regarding the US rate hike, “on the flip side, it might possibly lead to a postponement of US rate hikes, as strong USD and disinflation- ary impulse due to actions of various central banks (CN, EU, JP) might impact the conditions within the US. Furthermore, the notion of substantial real weakness in China (which the FX move indirectly signals) is, in itself, not inmaterial”.
Mirae Asset also analyses the impact of the devaluation in Renminbi, sector by sector:
