The new GLG Strategic Bond fund will reduce its defensive stance and explore opportunities in “very attractive” high-yield bonds once conditions in Europe improve, according to its manager.
Christophe Akel, who also co-manages the GLG Global Corporate Bond fund, considers the high-yield space in both Europe and the US to be very cheap at the moment after witnessing “substantial” outflows over the summer.
“I’m expecting that as soon as we get a bit of solution on the European side to have massive inflows into high-yield,” he says, adding he is mulling buying opportunities in the sector for the developing portfolio.
The portfolio of the GLG Strategic Bond fund, which launched on November 8, is currently “really defensive”, the manager says, holding a “big chunk” of cash, gilts, some short-dated single A credit and non-European single A credit.
“When you are in an environment driven by systemic risk, nothing is doing well. High-yield is underperforming but actually high-grade is doing poorly as well. If you hold anything else but gilts or Treasuries, you’re not safe,” he says.
However, Akel adds the fund’s ideal structure, when the situation in Europe is more certain and the portfolio is “up and running”, is likely to be 25%-40% in investment-grade, 25% in high-yield and the remainder in government bonds.
This breakdown will also move around depending on the manager’s macro outlook or the cheapness of one asset class relative to the others.
Including high-yield will allow the new fund to avoid concentrating on financials, which the corporate bond fund does because of benchmark constraints. “Having the flexibility to buy BB and B credit is an alternative to financials, offering same kind of yield without any of the systemic risk embedded in financials,” says Akel.
The manager is currently considering investing in the debt of one chemical firm, while he notes that a number of telecommunications companies have performed well recently.
While the default rate on high-yield is expected to increase in the coming quarters, owing its sensitivity to weak economic growth, Akel expects the default rate to remain significantly below what has been priced in by the market.
“Having a look at default expectations, it’s difficult to imagine lower defaults than where we are right now,” he adds. “On that basis, high-yield is pretty cheap but you want to play the duration well on high-yield. Short-dated high-yield is really attractive.”
A key strategy of the portfolio will be to couple a short duration on high-yield with a long duration for investment-grade debt, says the manager.
But Akel remains unsure of exactly when the situation in Europe is likely to improve and allow him to step away from his defensive positioning. “We don’t think there is any silver bullet to fix the eurozone,” he warns.
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