Fixed Income  

Ben Pakenham cuts low-quality bonds

Aberdeen’s European high-yield debt manager Ben Pakenham has cut his holdings in lower-quality debt as weak earnings hit companies across a range of sectors.

The changes come as the €432.1m (£378.1m) Aberdeen Global Select Euro High Yield Bond fund suffered significant losses in June, which Mr Pakenham said had wiped out more than half of the sector’s net inflows for one year.

Last year the portfolio was overweight CCC-rated bonds, which Mr Pakenham said was based on his belief that the European Central Bank had the tools to protect the euro from collapse.

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But more recently, as the eurozone has strengthened, the manager scaled back this position as valuations have compressed and reward for taking incremental risk has materially declined.

“As valuations have been getting a little revved up for taking more risk, we have been moving up the capital structure. We like [B-rated bonds] the most because they are yielding around 7 per cent with less technical risk,” Mr Pakenham said.

The fund now also has an underweight position in BB-rated bonds when compared with its benchmark. Mr Pakenham said these bonds only yield 4 per cent and “have got a lot of interest rate risk”.

He added that risk of default, though not worryingly high, was also increasing, reaching 3.4 per cent in the past 12 months compared with 2.1 per cent at the beginning of the year. Mr Pakenham also noted that bonds from the industrials and automobile sectors had fallen into BB grade, posing duration risk due to their low yields and cyclicality.

“We like single Bs as they have enough yield to protect them from duration, a sufficiently high coupon to protect you from a market sell-off – as long as it is not too severe – less beta and lower default risk relative to CCCs.”

In June the manager became concerned about outflows from high yield as investors withdrew money within a month equating to half of the total invested in 12 months prior to June, but Mr Pakenham said the fund had seen inflows return in July.

According to JPMorgan research the European high-yield market as a whole saw an outflow of roughly €2.4bn in June, also more than half the year’s net inflow.

Mr Pakenham said the sell-off – sparked by US Federal Reserve chairman Ben Bernanke’s comments regarding the tapering of quantitative easing – was “a bit of an overreach” by markets.

“Quantitative easing shouldn’t and couldn’t last forever,” he said. “One of the reasons we got into this mess is that monetary policy was too accommodative for too long.

“The market has become addicted to liquidity but recovery is more positive in the long term. The only reason Bernanke felt able to do this is [because] he is seeing a meaningful recovery in the US, and he said that if the Fed’s targets were not hit they would come back to being more accommodative – it’s a win-win for markets.”