Fixed Income  

Aberdeen: ‘Pullback’ could prompt bond fund capital losses

Aberdeen’s High Yield Bond fund manager Ben Pakenham has warned of the possibility of capital losses in high yield bond funds in the short term.

European high yield bonds had a strong run in 2012, up by more than 25 per cent in some cases, and the manager said that he was worried that there might be a ‘pullback’.

Mr Pakenham said that income levels on high yield bonds were still attractive, with his fund reporting a distribution yield of 8.3 per cent.

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The manager said default rates were so low that yield levels were quite safe, but that “with yields and spreads at this level, the opportunities for capital appreciation are significantly reduced and there is even room for a capital loss in the short term”.

“From a tactical, total return perspective there will frankly be better opportunities to buy into high yield later in the year,” he said.

In response to the market getting overvalued, the Aberdeen High Yield Bond fund has been reducing its risk level slightly, though Mr Pakenham said it would still be more adventurous than its IMA Sterling High Yield sector peers.

The high beta approach of the fund has seen it rise to the top quartile of the high-yield sector in the past year, with a return of 24.5 per cent compared to a sector average of 18.3 per cent, according to data from FE Analytics.

However, it is still underperforming the sector average since its launch in March 2011 because it sold off more heavily than its peers during the bear market in Autumn 2011.

Mr Pakenham said the fund’s investors accepted a little more volatility to achieve the high income (the fund’s yield is the second highest in the sector) but that the poor outlook had meant he had taken risk out of the fund, which would lower the yield slightly.

The fund also had a higher cash weighting than normal, at 7 per cent, to take advantage of new issues and to benefit from any pullbacks in the market.

Mr Pakenham said he was seeing opportunities in the services sector, such as cleaning services, technical services and gaming, but was bearish on the auto and chemical sectors.

In terms of regions, he said the fund was increasing exposure to France from a bottom-up perspective because there were a lot of interesting new issues coming out in France.