Jake Moeller, Lipper’s head of Research for the UK & Ireland reviews highlights of a meeting with Ben Pakenham, senior investment manager at Aberdeen Asset Management.
Many asset allocators are struggling to interpret the bond market at the moment. Fear of a bubble and a structural shift to an increasing-interest-rate environment present investors considerable food for thought. For Aberdeen’s Ben Pakenham (pictured), however, the view is refreshingly straightforward: high-yield bonds are the most removed from the bond bubble risk. “If you believe QE is effective in creating inflation growth and normalizing the economy,” states Mr. Pakenham, “yields will have to rise, and European high-yield bonds for income investors provide the best haven for this risk.”
Mr. Pakenham joined Aberdeen in 2011 from Henderson; he manages the €700-million Aberdeen European High Yield Fund with his colleagues Steve Logan (Head of European High Yield) and Mark Sanders (Senior Investment Manager). This fund has been a recent success story for Aberdeen (which has faced a number of recent outflow headwinds in its emerging markets business), and it has both a strong performance track record in a competitive sector and a gross yield to maturity (as of June 30, 2015) of 5.5%.
Diversification benefits of high-yield bonds are a recurring theme in Mr. Pakenham’s thesis. He recognizes there is some equities-type risk with the asset class, but he thinks the “pull to par” of a bond will result in a lower volatility profile. Certainly, there is a broader diversification benefit evident over the last ten years. There has been a 50% correlation with investment-grade bonds and a negative correlation with government bonds, and although these correlations have begun to increase in the risk-on/-off period of the last 12 months, Mr. Pakenham has been able to avoid sensitivity to government bonds by maintaining a comparatively lower duration in the fund (2.9 years against the market of 3.8 years).
Of particular importance to Mr. Pakenham are the structural differences between the U.S. and the European high-yield markets. He cites the progress of QE (Europe has just started its program as the U.S. winds up its) and the collapse of the oil price. With 15%-20% of the U.S. high-yield market forming funding for shale and gas companies, this has been significant. Europe has had virtually no exposure there. With the European high-yield market consisting of two-thirds of its assets rated in BB and approximately 40% of the market with a market capitalization of €30 billion or more, Europe is robust. It also has a higher average rating than the U.S. (less than 50% of the U.S. market is BB, and it contains three times as much CCC-rated debt).