Donald Phillips

Risk-off sentiment presents yield opportunity in good-quality high yield bonds

Donald Phillips

We all shuddered along with markets when, on Friday, we read the new variant headlines. In the days before these worrying headlines, the high yield market had been slowly re-pricing lower, mainly based on the anticipation of a reduction in the massive stimulus given to markets since Covid-19 reared its ugly face. 

With yields reaching close to 5% for the sterling investor, we were already getting more enthused by the value offered by our GF High Yield Bond Fund. Following Friday’s sell-off, we estimate the gross redemption yield of the fund rose to around 5.25% (~4% for euro investors). We think this represents good long-term value.

The fund is light in so-called ‘re-opening’ risk. We have a 1% holding in Saga, a UK-based company offering cruises, so this is certainly a company impacted by potential lockdowns, yet the majority of Saga’s profits come from its insurance (non-travel) segment. That’s the only travel exposure in the portfolio.

The fund has almost no exposure to oil & gas, with the only company held in the sector being Neptune Energy, a primarily gas producer in the North Sea.

We have a couple of exposures in the blood plasma industry, a corner of the healthcare market with good growth prospects. Collecting blood is curtailed by lockdowns, so further lockdowns would be impactful on Grifols (€10bn market cap) and Kedrion (private, but shareholder register includes the Italian state), but we believe both these companies would have the resilience to deal with this. 

Of course, we have companies impacted by any slowdown in the economy, but overall we have a relatively low exposure to cyclicals, and, where we do own more economically sensitive companies, they have minimal debt to refinance any time soon. Indeed, this is generally true of the high yield market after a substantial period of issuance and is a key reason why so many are sanguine on the rate of defaults next year. Despite a constructive view on defaults, we continue to be reluctant to buy the lowest quality parts of the high yield market. For example, we have only 5% of the fund in CCCs.

We are not calling any bottom and don’t pretend to try. There are days and weeks of scientific testing ahead and more headlines to come. However, when we look at the portfolio and consider the risk of capital loss from the impacts of potential future lockdowns, we view a yield north of 5% as an attractive entry point in a world starved of income. 

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Monday, November 29, 2021, 3:39 PM