Henderson European corporate bond fund breaks €1bn assets as debt yields are “ridiculous”

Assets in the Henderson Horizon Euro Corporate Bond fund yesterday topped €1bn less than three years after its birth, as investors starved of yield in core debt markets continue to seek decent coupons elsewhere.

Chris Bullock (pictured), the fund’s co-manager, reiterated the importance his firm attaches to capacity levels in its $27bn fixed income unit as the portfolio surpassed the milestone on over sixfold asset growth this year.

Henderson’s CEO Andrew Formica pointed to dismal, sub-2% yields on much core debt these days as a reason for strong client interest in higher yielding portions of fixed income.

“You look at Bunds and gilts and Treasuries and they are at ridiculous levels, and it is not going to help anyone putting money into Treasuries at these levels. Investors will wake up and regret that, and say, ‘why did I do that?’ Now investors are moving to high yield.”

Clients who chose Bullock’s fund in mercurial fixed income markets made 12.4% this year to 28 September, and 27.4% since inception, according to the firm.

Henderson’s fund celebrates its third birthday on 19 December.

At €1bn, Bullock added, it is still only half way to the top end of its manageable capacity.

This would be double the cap on Henderson’s absolute return fund.

The firm has shown itself to be very mindful of when ‘enough is enough’, as head of credit Stephen Thariyan recently told delegates at an Investment Europe seminar the firm had targeted a cap size for its Horizon Euro High Yield Bond fund, still to be launched.

Bullock said: “If you get too large it becomes difficult to implement your strategy”.

This is not only a problem for some pooled funds, he added, “but some segregated [funds] for large insurers and pension funds are trying to trade tens of billions [of euros] in the market.”

He said it was crucial in such surrounds to move money in markets before such rivals.

“We have an awful lot of focus on market technical and we go through positioning and investment bank contacts and dealers to understand what our competitors are doing. You have to understand what the next big positioning will be because once it has happened it is too late. If you cannot get the technical right in the credit markets these days, even if you have brilliant analysis and macro views, it is the technical that matter.”

Amid strong inflows to the sector generally, Bullock defended against claims European credit is in bubble territory.

He pointed to exponential growth in market volumes, and to unrealistically pessimistic global default rates for five-year sub-investment grade credit, as implied by current spreads.

At present, on 40% recovery rates, one third of a portfolio of BB-rated credit could default, and the fund’s manager would still break even. For B-rated credit 45.5% could default, and 59.5% for CCC-rated paper. Even the worst historic default rates since 1970 have not been so harsh.

Bullock acknowledged pockets of the market, such as financials, have witnessed contraction of about €200bn this year – “an enormous adjustment” – as banks shrunk balance sheets and sold off non-core assets.

Henderson is busy further expanding its fixed income complex.

Jim Irvine, head of the department, said he would have announced the hiring of a team in the US this week, had Hurricane Sandy not got in the way.

Irvine said it was important to offer global fixed income products in the current environment – one of Henderson’s ongoing plans – as well as US products.



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