Stephen Marsh (pictured), fixed income portfolio specialist at T.Rowe Price, gives InvestmentEurope his view on the European high yield bond space.
The asset manager runs a European High Yield Bond Fund – €605.4m of AUM as of end August 2016 – managed by Mike Della Vedova who works alongside Marsh.
The strategy has had an overweight allocation to B rated securities and has been underweight BB rated bonds for months.
Marsh observes that currently, more than 60% of the European high yield market is BB rated and yields less than 3%.
“Therefore we believe investors have more advantageous risk compensation in the single B segment where inefficiency occurs that our credit research capabilities are poised to capitalize on. Our portfolio reflects bottom-up security selection with well-calculated risks to build a portfolio with a current yield advantage over our benchmark.
“Despite risks typically associated with greater yield, we believe our defensive stance is reflected through a higher coupon profile positioned to withstand volatility over the long-term,” Marsh says.
Average coupon was 7.49% at the end of last month and bonds picked into the fund had an average maturity of 6.15 years.
In the European high yield bond universe, Marsh favours the cable and satellite TV sector, which currently remains the largest allocation of the fund with “meaningful positions in Altice, Liberty Global Group and several of their subsidiaries.”
“The cable sector enjoys relatively defensive characteristics, including stable cash flow throughout the cycle and steady EBITDA growth based on wider offerings and demand. Additionally, elevated mergers and acquisitions activity in recent years is creating meaningful synergies within the industry,” Marsh argues.
A recent addition to the fund has been that of Intralot, a global firm supplying integrated gaming systems and services.
“Intralot enjoys diversification across contracts, geographies and business activities extends across 45 countries, reducing regulatory and market risk. An increase to the gaming sector is based on our individual credit positions rather than a call on the overall industry,” T.Rowe Price’s fixed income specialist explains to InvestmentEurope.
Regarding issuances in the space, Marsh stresses that the European high yield new issue volume more than doubled in Q2 2016, “albeit from meager levels in the first period.”
He says US dollar-denominated European issuance have increased during the quarter. However, he observes a considerable slowdown in all capital markets occurred right after the Brexit vote in June.
“As expected, primary issuance took an early and prolonged summer holiday post-referendum, keeping the interest and demand focused on secondary trading. We expect that the primary market will reopen with a focus on refinancing,” Marsh explains.
Has liquidity improved in the European high yield bond space with the launch of the ECB’s asset purchase program?
“Summer months tend to see less trading volumes regardless. August in particular was quiet with no market shocks or fresh political uncertainties – a welcomed change from prior months. Spreads have continued to grind tighter benefiting from the ECB’s corporate bond purchase program.
“Of note, recent limited primary opportunities and wider market stability resulted in a slight increase in risk comfort as the high yield to investment-grade spread and B-BB spread differentials tightened in August,” Marsh answers.
T.Rowe Price’s fixed income specialist says the team is watchful of the ECB actions and market technicals as he believes these could readily drive investor demand towards the longer end of risk curves irrespective of individual credit fundamentals.