We all shuddered along with markets when, on Friday, we read the new variant headlines. In the days before these worrying headlines, the high yield market had been slowly re-pricing lower, mainly based on the anticipation of a reduction in the massive stimulus given to markets since Covid-19 reared its ugly face.
With yields reaching close to 5% for the sterling investor, we were already getting more enthused by the value offered by our GF High Yield Bond Fund. Following Friday’s sell-off, we estimate the gross redemption yield of the fund rose to around 5.25% (~4% for euro investors). We think this represents good long-term value.
The fund is light in so-called ‘re-opening’ risk. We have a 1% holding in Saga, a UK-based company offering cruises, so this is certainly a company impacted by potential lockdowns, yet the majority of Saga’s profits come from its insurance (non-travel) segment. That’s the only travel exposure in the portfolio.
The fund has almost no exposure to oil & gas, with the only company held in the sector being Neptune Energy, a primarily gas producer in the North Sea.
We have a couple of exposures in the blood plasma industry, a corner of the healthcare market with good growth prospects. Collecting blood is curtailed by lockdowns, so further lockdowns would be impactful on Grifols (€10bn market cap) and Kedrion (private, but shareholder register includes the Italian state), but we believe both these companies would have the resilience to deal with this.
Of course, we have companies impacted by any slowdown in the economy, but overall we have a relatively low exposure to cyclicals, and, where we do own more economically sensitive companies, they have minimal debt to refinance any time soon. Indeed, this is generally true of the high yield market after a substantial period of issuance and is a key reason why so many are sanguine on the rate of defaults next year. Despite a constructive view on defaults, we continue to be reluctant to buy the lowest quality parts of the high yield market. For example, we have only 5% of the fund in CCCs.
We are not calling any bottom and don’t pretend to try. There are days and weeks of scientific testing ahead and more headlines to come. However, when we look at the portfolio and consider the risk of capital loss from the impacts of potential future lockdowns, we view a yield north of 5% as an attractive entry point in a world starved of income.
Key Risks
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
Investment in Funds managed by the Global Fixed Income team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Bond markets may be subject to reduced liquidity. The Funds may invest in emerging markets/soft currencies and in financial derivative instruments, both of which may have the effect of increasing volatility.
Disclaimer
This information should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust. Always research your own investments and if you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.