McNeil grows ‘selective’ over new issuance
Kames Capital’s Euan McNeil has become “far more selective” about new issuance in the corporate bond market as deals are offered to investors at increasingly unattractive terms.
Mr McNeil, who co-manages the £1bn Kames Investment Grade Bond fund, said a more prudent approach to these deals has helped the fund maintain its outperformance during a tricky time for fixed income.
Issuance in the US in particular have been strong this year: US firms have already raised a record $900bn (£574bn) year to date as they rush to lock in cheap funding ahead of an expected rise in interest rates.
Investors’ desire for yield has meant many of these issues have been oversubscribed, but Mr McNeil said he has taken a firmer line with companies seeking to increase the size of deals or change the terms on offer.
The manager said: “I think the market’s now a bit beaten up and cynical about the pricing intentions of issuers – particularly in the US.
“We have been far more selective from the second quarter onwards in terms of issuances. That has protected the portfolio.
“What benefits a portfolio against the competition is sometimes what you don’t own as much as what you do.”
US investment-grade debt spreads have widened notably since the second quarter, suggesting other buyers are taking a similar approach.
These trends are not just confined to the US. In their most recent quarterly review for the fund, Mr McNeil and co-manager Stephen Snowden noted that new sterling issuance from Whitbread and Center Parcs were rare bright spots in the second quarter of 2015, at a time when much of the generic euro and dollar issuance has struggled.
At the end of June, the fund had increased its cash balance to 2.4 per cent of its portfolio – reflecting a preference for holding back some of its credit risk budget for more attractive opportunities in the future.
More generally, Mr McNeil said he has focused on de-risking the portfolio in what he has described as “a volatile three or four months”. Investor sentiment has been hit by concerns about the Chinese economy, bond market liquidity, and the possibility of interest rate rises in the US and UK.
He has done this in part by moving the fund’s duration underweight that of his peers in order to reduce the portfolio’s interest rate risk.
The fund has the capacity to allocate up to 20 per cent in high yield, but Mr McNeil currently holds just 10 per cent, noting that he has been “quite cautious” on this front, again because of the prospect of a US rate rise next month.
He added: “Our high yield guys are somewhat nervous around the capacity for supply in September.”
