Aberdeen’s Pakenham: Why B-rated bonds outperformed BB in the sell-off

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Aberdeen Asset Management high yield portfolio manager Ben Pakenham says BB bonds underperformed B-rated debt during the June sell-off as a result of investment grade “tourists” dipping into high yield and BB bonds.

The £22.6m Aberdeen High Yield Bond fund’s underweight position in BB versus the index was “very much validated” in June, says Pakenham, when BB-rated bonds were hit hard during investor’s mass exit from bonds during June.

Packenham points out that investment grade investors had been dipping into high yield through BB bonds, but then panicked and sold as part of the sell-off.

“There are tourists buying high yield bonds, with lots of  investment grade investors dipping down into BB to pick up incremental yield to boost the yield of the fund or duration. They don’t want to go lower to avoid genuine default risk,” he says.

“However I think a lot of the panic selling came from investment grade during the sell-off. What we saw was a number of BB bonds get really badly hit, genuinely fall 5 to 6 per cent in June. This is just not the kind of risk that investment grade investors should be taking.”

B-rated bonds also faired better during the sell-off because they are less sensitive to government debt, adds Packenham. He says: “BB have a relatively low yield of 4 per cent and the lower the yield the higher the duration.

“This makes BB more sensitive to government bonds than lower parts of the high yield market. This was one of the reasons why BB performed poorly relative to B-rated bonds in June.”

Following on from the June sell-off, the Aberdeen High Yield Bond fund continues to favour an overweight position in B and underweight BB, according to Pakenham.

He adds that July has seen both the asset class and the fund experience an “aggressive” rebound , with the fund regaining all of its previous lost performance from June over the course of the month.