Low yield challenge tailwind for YCAP ’s German distribution
With the majority of its team being German speakers, Luxembourg- based fixed income boutique YCAP is perfectly prepared to venture into the German market. The question then is whether German investors are ready for its products, which are exclusively based on nonsovereign debt, given the suggestion that European Central Bank (ECB) policies have provided an important tailwind, given the risk aversion of many German institutional investors.
YCAP evolved in 2011 as a result of an acquisition by the Structured Credit Asset Management team of LBBW Luxembourg. The boutique currently offers fixed income funds ranging from investment grade corporate bonds to
long/short, high yield, or asset backed securities (ABS). Since the spring of 2014 it also offered a distribution focus on semi-institutional and institutional investors in the German market.
The beginning has been challenging, but there is reason for optimism, according to Lisa Backes (pictured), managing director of YCAP asset management Europe. “Many German investors were initially wary of ABS. It is an asset class which requires profound knowledge,” she stresses.
YCAP and its predecessors have been working on areas such as ABS and derivatives since the early 2000’s. Backes describes the manager’s Euro Corporate Fund as “conservatively run”, not containing ABS, credit derivatives or foreign currency denominated bonds adding: “We generally exclude sovereign risk and concentrate on single-name risk assessments.”
The Corporate Opportunity Fund on the other hand has a broader investment universe. It aims to use a strategy that can benefit from inefficiency in yield spreads between credit default swaps and corporate bonds, explains Olga Dubko, senior asset manager at YCAP.
Two developments are seen as working in YCAP’s favour. On the one hand, low yields are making sovereign debt increasingly unattractive, leaving investors to search for other investment opportunities.
On the other hand, the ECB’s pledge to conduct large scale ABS purchases “has helped to make ABS salonfähig – presentable – says Backes. “We have seen a shift in demand for our products. As a result of the ECB measures, institutional investors are now increasingly interested,” adds Martina Boesen, senior asset manager at YCAP.
Yet venturing the high yield sector without sufficient information of the asset class can be dangerous. “When yields started to approach zero by the middle of last year, a lot of investors entered HY as tourists
and ended up burning their fingers on Phones 4U,” says Dubko. “Higher yields are increasingly attracting investors who don’t have a sufficient know-how of the asset class and
think they can get away with copying others,” she warns.
Added to that is the fact that low yields are pushing investors into longer duration debt, thereby reducing their ability to respond to market challenges. The only remedy in such a situation is good old fashioned fundamental analysis argues Boesen. “We try to take not just past performance, but also future investment potential and scenarios such as possible M&A into account before making an investment decision.”
NEGATIVE CORPORATE YIELDS
As a fixed income investor, the elephant in the room is of course the growing number of corporate yields approaching negative territory. What is YCAP’s stance? “Given that the portfolio of the Euro Corporate Fund is limited to investment grade products, there is of course a possibility of certain bond yields turning negative, but at the moment, we don’t have any exposure to it and we don’t aim to have it,” says Boesen. “Nobody knows when the cycle will change. Investors should be very conscious that such a transformation could have very far reaching consequences,” she warns.
“We have of course a broad variety of products, even in our most conservative portfolio, we do include –A rated bonds. And even though secondary market offers less liquidities, there is still a lot of value to find, we therefore see plenty of opportunities to avoid negative yields whilst generating return with fixed income” Boesen concludes.