When the herd is galloping in a particular direction, it takes guts to keep your head and go in the opposite direction. That is where VFM portfolio manager Uli Gerhard excels. He now manages the Insight High Yield Bond Fund, as well as, being responsible for the high yield product (VFM).
“Financial markets tend to be governed in equal measure by greed and fear. In the market – any market – people often act like lemmings. When people are scared, they want to sell and they may sell at any price. But if this panic is irrational and merely down to emotion, and nothing has changed with the fundamentals of a particular company, then arguably an investor should buy at what may feel the most uncomfortable moment.
“Investors who were brave enough to buy sub-investment grade bonds in 2009 may have achieved impressive returns if they were able to pick up good-quality assets at ludicrously low prices. While the sell-off in September was nowhere near the same magnitude as that seen during the peak of the credit crisis, it was not one that had, in my view, anything to do with deteriorating fundamentals. For me, this was a time to add exposure,” he said.
Mr Gerhard is a portfolio manager specialising in sub-investment grade bonds, also known as high yield bonds, at Insight Investment, a London-based fund manager with €318.5bn under management1. Mr Gerhard manages a number of high yield bond portfolios, including the €53m Vilhena High Yield Fund2, which is offered in Malta by Valletta Fund Management (VFM).
VFM offers five different diversified portfolios
Marketing and Business Generation of VFM, Mark Vella, explained that VFM’s wealth management team often recommended a diversified investment portfolio to its retail customers, spread across cash in bank accounts, some investment grade bonds, some high yield and some equities.
Vella said: “In Malta, people like income. In equities, income investors are dependent on a company issuing a dividend but bonds generally pay an income on a quarterly or half-yearly basis. You only get 1.5 to 2 per cent from investment grade bonds but in sub-investment grade the income may be higher.”
Mr Gerhard dismissed the notion that high yield must always mean high risk, saying that stock selection is key to success.
“Default rates in Europe remain very low, below 1%, and this will probably remain the case over 2015. Companies, whether investment grade or sub-investment grade, can default out of the blue, and this will always happen on occasion. While there is little that investors can do about this ‘idiosyncratic’ default risk, if you are able to carry out in-depth bottom-up credit analysis, you are more likely to pick strong companies and avoid those that are deteriorating,” he said.
Surely this is an easy claim to make – and one which all portfolio managers would make? But he is not fazed by the question.
“It is important to have a large and experienced analyst team and a specific process in place to analyse companies, with a repeatable and consistent approach.”
Insight has €3.2 billion invested in its high yield strategies3, giving the company considerable clout when it comes to attracting the best analysts for general as well as specific sectors. The credit research team in London and New York consists of 22 analysts who each specialise on specific sectors, conducting thorough bottom-up analysis and regularly meeting company management teams.
There are a greater number of companies to choose from in the US which can be strong and generating good cash flow
His views are clear: Europe will remain weak for the foreseeable future, while the US economy will continue to grow. As such, he believes a global investment approach is the way to go, with a focus on the US high yield market.
“There are a greater number of companies to choose from in the US which can be strong and generating good cash flow. In Europe, many high yield companies tend to produce less cash flow after having issued their bonds and deleveraging the balance sheet is typically only achieved through earnings growth. The US high yield market is more mature, with a broader investor base and a far greater liquidity” he said.
In addition, he said “One way to boost returns within high yield is when your sub-investment grade bond is upgraded to investment grade, a so-called ‘rising star’. Unfortunately, in Europe, these opportunities have been few and far between in recent years.”
The level of exposure he has taken in the EU periphery – Italy, Spain and Greece, for example – is very limited. Mr Gerhard is honest about their prospects.
“Many of them are very small companies who will find it difficult to operate when things get tough.”
“Secondly, many are narrowly-focused regional businesses and you have to be able to understand the region’s economic context. For instance, if the company concerned is a local Spanish bus operator, you have to be in a position to appreciate whether they are going to win or lose a concession.”
“So I believe it is preferable to look at multinationals which are active in more than one region and more than one activity. Diversification in geography can help to mitigate risk.”
1 As at September 30, 2014. Assets under management are represented by the value of cash securities and other economic exposure managed for clients.
2 As at September 30, 2014.
3 As at September 30, 2014.
The opinions expressed herein should not be interpreted as investment advice. Past performance is not a guarantee to future performance. The value of the investment can go down as well as up and any initial charges may lower the amount invested and the amount received upon redemptions. The income that the assets of the Fund generate in relation to their value or market, and the frequency of payment may vary and are not guaranteed. Investments should be based on the full details of the Prospectus, Offering Supplement and the KIID which may be obtained from Valletta Fund Management Limited (“VFM”), Bank of Valletta plc Branches/Investment Centres and other Licensed Financial Intermediaries. VFM is licensed to provide Investment Services in Malta by the MFSA. The Vilhena Funds SICAV plc is licensed by the MFSA and qualifies as a UCITS.
Issued by VFM, TG Complex, Suite 2, Level 3, Brewery Street, Mriehel BKR 3000, Malta. Tel: 21227311, Fax: 22755661, Email: infovfm@bov.com, Website: www.vfm.com.mt. Source: VFM