Fixed IncomeMay 18 2015

Fund Review: Aviva Investors High Yield Bond fund

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The manager of this high-yield bond fund, Chris Higham, says his objective is to achieve top-quartile performance in its peer group, the Investment Association Sterling High Yield sector.

He notes: “Given the nature of the asset class and the bonds it’s investing in, the main restriction within that peer group is the fund has to maintain at least 80 per cent in high-yield bonds.”

He advises that investors should expect the majority of returns from the £108.8m fund in the form of income.

Mr Higham refers to the portfolio – which has around 80 holdings – as “very focused”. Stock picking is the main driver of returns and outperformance, with the largest holdings each comprising roughly 2.5 per cent of the fund. The portfolio is “sufficiently diversified”, the manager says. “It’s about avoiding losers and picking winners and we think the conviction and the concentration in the portfolio sets us up pretty well to do that.”

He has twice been the lead manager of the fund. “Andrew Lake joined and left, so that was the reason for the fund manager changes,” he explains. “But the broader team involvement has been fairly consistent from launch. We have in-house economists and an in-house strategy team, so we have a house view for setting the scene. Given the fact [this fund] will always be invested in high-yield bonds, it hasn’t been the main driver of returns. It is about the stock selection, but clearly we do tilt the portfolio relative to those in-house macro views.”

Three areas that the manager has been avoiding include the energy sector, food producers and financials. “We also avoid second- and third-tier banking names,” he adds.

“On the energy side, it’s been no surprise that house names have performed particularly badly. [With] the macro theme, we think growth, inflation and corporate defaults will be low and consequently we prefer non-cyclical companies. Our view on the energy sector is that there hasn’t been enough compensation for what ultimately is a very cyclical sector. So it’s a sector we have avoided and continue to avoid, in spite of the stabilisation in oil and energy prices.”

The fund is considered a level four on a risk-reward profile, while the ongoing charge is 0.65 per cent for the class two clean retail-class income shares.

The portfolio ranks in the top quartile of its peer group across one, three and five years, data from FE Analytics shows. The fund returned 42.79 per cent in the five years to May 4 2015, compared with the sector average of 33.9 per cent in the same period. It has continued to outperform in the past year, delivering a return of 5.38 per cent, which is slightly ahead of the sector average of 1.75 per cent. FE Analytics’ data reveals that an initial investment of £1,000 at launch would have earned investors an income of £523.73 by January 16 this year.

Mr Higham points to cinema group Odeon as one of the holdings that has added to the portfolio’s performance in the past 12 months. He notes that a few tenders this year have helped performance, including an Anglian Water bond being tendered for.

While the manager confirms his preference for UK and Europe against other regions, he adds that the fund is moving away from euros and into US dollars. “We have started to introduce more US dollar [-denominated] high yield to the portfolio and that is something we think will be an ongoing trend for the next few years,” he says. “As a consequence of quantitative easing within Europe, we have seen European high yield continue to outperform, but we think its ability to continue this is reduced as the yield differential is now very high within the US. The yield on offer in Europe is just more than 3 per cent, whereas it is above 6 per cent in the US.”

The reasons for the recent underperformance of the dollar market include the energy sector, the divergence of monetary policy, the strong US dollar and “volatile” fund flows, he points out. But he admits he is becoming “more comfortable” with these concerns, having seen energy prices stabilise and an expected interest rate rise later this year.

“We’ve started to move into the US. It’s around 10 per cent of the portfolio at the moment, but that’s something we are looking to increase,” the manager adds.

EXPERT VIEW

Martin Bamford, chartered financial planner and managing director, Informed Choice

This fund has been a consistent top-quartile performer in the past five years, although Chris Higham has only been running it for half that time. It’s a well-diversified portfolio, with around 80-90 underlying assets that give investors a good spread of risk. UK investors will be reassured that 80 per cent of the fund’s assets are priced in sterling or at least hedged back to that currency. The manager has a good deal of flexibility in terms of selecting assets. This fund remains quite small given its recent success and we expect it to grow as more investors gravitate towards the higher-yield end of the credit spectrum.