In a complex environment, the high-conviction active style, emphasis on credit selection and risk-aware approach, seeks to produce a track record of strong risk-adjusted returns for Aegon Asset Management’s High Yield Global Bond Fund.
For the fourth year in a row, the fund won the Refinitiv Lipper Fund Awards Europe 2023: Best Fund over 10 years for the High Yield Global Bond Fund (USD, A Inc), also adding the 5-Year award in 2023.
The manager gave an interview to Funds Society and spoke about the investment approach for the fund, the reasons for some of the investment allocation choices, and also offered his perspectives for high-yield bonds in a recessionary environment and potential upside for this particular asset class.
“Recession risk still looms on the horizon and we believe markets will remain volatile in 2023. Despite macroeconomic uncertainties, high-yield credit fundamentals appear to be in relatively good shape”, says Thomas Hanson, CFA and Head of Europe High Yield at Aegon Asset Management.
Going into 2023, most high-yield companies had healthy balance sheets, with historically low leverage and high interest coverage. “While the ratings momentum will inevitably reverse, most companies remain disciplined and have high levels of cash to help meet debt obligations”, he emphasizes.
According to Hanson, most high-yield companies could weather a downturn as “short-term maturity risk is relatively low, with few bonds maturing in 2023 and 2024, which can help mitigate default risks”.
Credit issuers have been able to prepare themselves for one of the more anticipated recessions, by implementing changes, such as cost control measures. “It is important to note that the average quality of the overall high-yield market is much higher today than it has been in years. There are fewer CCCs and below, and a higher proportion of BBs in the index. There is no doubt that downgrades and defaults will tend to increase as the cycle changes, but the higher quality nature of the market could also help limit distress and defaults compared to previous downturns”, the manager says.
As rates have shifted higher, high yield is now living up to its name. Yields above 8% on the ICE BofA Global High Yield Index look attractive, however spreads remain around long-term averages. This leaves many investors facing a conundrum as they try to evaluate the path forward for spreads and the optimal entry point for high yield bonds.
Given the macro uncertainty, it is unlikely that we see sustained spread tightening in the near term, although a relatively tight technical can exert positive tailwinds. While entry points matter, and spreads could be biased toward widening as the recession becomes more imminent, yields above 8% have historically provided above average total returns for long-term investors. Since 2008, yields above 8% have been relatively rare. These periods have historically resulted in double-digit returns over the subsequent one-, three-and five-year periods.
Hanson believes that long-term investors have reason to consider gradual increases to high yield in an effort to capitalize on attractive returns, provided they can weather some short-term volatility. “After all, it’s time in the market, not timing the market, that matters in high yield”, he adds.
“Over the long term, global high yield has generated risk-adjusted returns that are competitive against many other fixed income assets and even equities. As such, we believe the structural case for high yield remains intact“, Hanson says.
The Aegon High Yield Global Bond Fund is managed in an active style and aims to maximize total returns, including high income plus capital appreciation, while also remaining focused on generating strong risk-adjusted returns. “We manage a high-conviction portfolio of our best investment ideas”, he explains. “Our approach is bottom-up security selection. Backed by a structured top-down process, we embrace a dynamic approach to allocating to regions, ratings, and sectors”, Hanson adds.
The fund’s mandate is flexible and not bound by an index: it invests only where it finds there is value. “We believe this flexible approach helps us maximize the opportunity set and avoid unwanted constraints imposed by a benchmark as we aim to outperform our peers and global high yield indices”, he indicates.
In the current environment, with challenging economic prospects, the fund is pursuing an up-in-quality strategy. “We have been adding exposure -says Hanson- in higher-quality, BB-rated bonds with attractive yields. There will be a time to increase allocation to lower-rated high yield, however downside risks remain, and we think it is prudent to be modestly defensive in this environment”.
In terms of regions, Aegon AM is finding high-conviction ideas in US and European corporates, and it maintains its underweight in emerging markets.
Hanson is interested in some leisure companies that are benefiting from pent-up consumer demand. “While some of these businesses may be operating in more challenging sectors, we manage risk by selecting stocks that are more senior in the capital structure in an effort to preserve client capital”, he says.
The fund has a long track record. When asked what has been the biggest lesson learned over the years, Hanson states: “We continue to believe that our high-conviction, bottom-up approach has driven our successes over the years. Throughout this time, we have learned the importance of using a risk-aware process supported by in-depth bottom-up research. Maintaining investment discipline is central to our style”. He adds that, using a risk-focused mindset, “we remain focused on taking sufficient, but not excessive, investment risk as we pursue performance targets”.
Hanson embraces a dynamic approach to allocating to regions, ratings and sectors, supported by a global team of research analysts. “We take pride in our willingness to build a portfolio that we believe is different than peers, as we focus exclusively on our highest conviction ideas and are not beholden to a benchmark”, he remarks.
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