Lundie looks to unpopular debt amid illiquidity fears
Hermes bond manager Fraser Lundie is focusing on unpopular sectors such as mining debt, in the hope contrarian positions can protect him from potential bond market illiquidity.
Mr Lundie, who runs the £492m Hermes Multi Strategy Credit fund, has recently bought debt issued by gold miner Barrick Gold, having added a position in Russian steel and mining company Severstal earlier this year.
Mr Lundie said: “We do like areas that equities don’t like because there is not much visibility, such as metals, miners, speciality chemical players, gold producers and certain parts of steel.
“We like emerging market investment-grade debt. A lot of that area is export driven.”
A presence in less popular markets also enables the managers to dodge more crowded trades favoured by peers, Mr Lundie added. He said he is more likely to find buyer demand in times of market stress from a less-crowded market.
“[It’s] pretty out of consensus,” he said. “The consensus is towards Europe. Given the liquidity problems in credit, I would rather get stuff wrong where nobody else is, rather than get it wrong where everybody is.”
He added: “We don’t like taking complexity or illiquidity premiums. We don’t buy distressed credit or asset-backed securities. We are taking a view on more liquid credit.”
The manager is also considering opportunities in the US healthcare space, after comments made by US presidential candidate Hillary Clinton prompted a sell-off in the area.
During her election campaign, Ms Clinton pledged to ensure savings from healthcare reforms benefited “families, not just insurance companies, drug companies and large corporations”.
Mr Lundie said: “We are looking at the US healthcare space, which has fallen on Hillary Clinton’s comments about restricting pricing power.
“Some companies have been sold off but are unaffected [in terms of their business models]. We are looking at that, but haven’t done anything yet.”
In spite of favouring contrarian positions, the manager is keen to avoid debt from companies that could be hit by a Chinese slowdown and a strong dollar.
“There were a number of bearish trades in global hard technology – PC makers and semiconductors,” the manager said.
“That relates to their exposure to China. They also don’t behave well with a strong dollar and don’t have much cashflow. We don’t like companies like Dell, NXP Semiconductors and STMicroelectronics.”
Furthermore, the manager’s concerns about the strength of the global economic recovery have led him to remain skewed towards quality issuance across his portfolio.
He said: “We are still pretty heavy on quality. We have concerns that recovery will not be as strong as in the past.
“In recent years large-cap companies have chosen to buy back stock rather than invest – there is less of a likelihood they will bid for a distressed factory, for example. That’s hitting recovery rates, as well as the fact there is no growth.
“Some of the defaults we will see will be in distressed sectors like energy. There aren’t any players in energy that want to buy a bankrupt company.”
According to FE Analytics the fund has returned 1.3 per cent over a year, compared to 1.4 per cent from the IA Sterling Strategic Bond sector.
