Aberdeen’s Brooks spies value in loans
Aberdeen Asset Management’s Mike Brooks has been adding to “inherently lower-risk” alternative fixed income funds as a way of taking advantage of the credit sell-off without adding to high yield.
Mr Brooks, who co-manages the firm’s Diversified Growth fund, has increased his allocation to loans by adding to holdings such as the NB Global Floating Rate Income fund.
The manager has kept the £180m portfolio’s weighting to high-yield debt “largely unchanged”, but exposure to loans has risen from 3 per cent to 10 per cent this year.
The Neuberger Berman fund to which he has added seeks to generate an income by investing in sub-investment grade senior secured corporate loans and other instruments.
Mr Brooks said that while opportunities are present in high yield – an area that still makes up some 10 per cent of the fund – loans offer a better margin of safety for investors.
“Generally, we are seeing better opportunities in higher-yielding credit markets than equities,” he said. “We could have expressed that through high-yield bonds. But we do have concerns that where high-yield bonds look cheap, they could get cheaper still.
“We have decided to invest more in loans. It’s similar to high-yield bonds but from our point of view, we have security over the underlying assets of the company.”
Mr Brooks said that, in the event of a company defaulting on a loan, more of the investment could be recovered than with a high-yield bond.
“If the company does go bust, we can recover a lot more of the money,” he said. “When a high-yield bond defaults, we can get back 30 to 40 per cent of the money.
“When a loan defaults, we get 70 to 80 per cent of the money back, so we have inherently lower risks.”
The additional investment in the loans space has come at the expense of investment grade bonds – which Mr Brooks has sold out of entirely – and emerging market bond holdings.
“You can get a higher level of return in loans at a lower level of risk,” he added. “We don’t think emerging market bonds are a terrible place to be, but the risk-return trade-off is better [with loans].”
Others areas favoured in recent changes to the fund, which targets an annual return of one-month Libor plus 4.5 per cent, include asset-backed securities (ABS), with Mr Brooks adding to a position in TwentyFour Asset Management’s £114m Asset Backed Income fund. As of February 29, ABS holdings made up just over 5 per cent of the Diversified Growth fund.
Mr Brooks also suggested subprime property loans could offer attractive returns, because they are still being avoided by most investors as a result of their role in the financial crisis.
“There’s a risk premium that’s behaviourally and psychologically driven, regardless of the situation,” he explained.
“That’s an area we think will generate high single-digit returns. It got abused in the US but has performed very well. If you do your research, there are a lot of attractive investment opportunities.”