Launched in October 1999, the £827.1m Threadneedle High Yield Bond fund has been managed by Barrie Whitman since launch. The manager notes the main focus is to generate attractive risk-adjusted returns for investors by investing primarily in non-investment grade, high income-generating bonds, from companies in the UK, Europe and globally.
Mr Whitman, who co-manages the fund with David Backhouse, explains: “The fundamental characteristics of companies issuing high yield bonds often change, which we believe can provide active managers with good investment opportunities. It is also a relatively new market which is not as well researched as mainstream stocks or bonds.”
The team’s focus is on bottom-up fundamental credit analysis. A team of high yield analysts performs the primary research on securities, which includes assessing the issuing company’s business strategy, ownership and management, financials, capital structure and valuation.
In addition Mr Whitman notes the research also includes metrics such as overall ratings, duration of the bond, sector positioning and so on. Views are then debated by the team, with the fund managers making the final investment decision. The manager explains: “An intense focus on a company’s downside risk is a prerequisite of success in this asset class and therefore an integral part of the fund managers’ investment process.” Perhaps as a result of this focus, the risk-reward indicator on the fund’s Kiid notes a mid-level of 4 while the ongoing charges are recorded as 1.46 per cent.
Mr Whitman adds: “Analysing market themes and macro-economics is an integral part of Threadneedle’s investment culture. Our high yield team members are predominantly bottom-up stock pickers who examine company accounts, balance sheets and profit and loss statements in order to identify undervalued companies and, most importantly, avoid those that may default.
“Recognising the importance of macro analysis, however, means that they incorporate macro factors into their portfolio construction and at times, they can become a dominant theme. For example, during the eurozone peripheral debt crisis, country selection played a very important role in our research.”
Since launch to May 15 2014 the fund has delivered a reasonable 143.34 per cent against the IMA Sterling High Yield Bond sector return of 136.29 per cent, although the three and five year track record are slightly lagging the sector with returns of 20.6 per cent and 80.1 per cent respectively, according to FE Analytics.
On a sector level he notes the biggest contributions to the fund performance have come from investments in the basic industry, telecoms and banking sectors. Meanwhile, on the flipside, lower rated CCC issuers have “detracted somewhat from performance”. The manager adds: “Our duration positioning saw some underperformance, mainly due to positioning in peripheral Europe, where the fund has been underweight.”
In terms of changes to the portfolio the manager highlights a number of corporate re-financing and M&A transactions recently, “which translated into many new high yield bond issuances”.
“We have selectively participated in both corporate and financial issues, for example by buying Telecom Italia and KBC bonds. We also participated in the first stage of a long expected WindTelecomunicazioni refinancing, one of the largest European high yield issuances yet.
“In addition, we have been building our exposure to European telecoms in the recent months as we have a positive view on the potential consolidation in the sector,” he explains.
Looking ahead he notes that while the economic recovery in Europe is “proceeding as expected”, the focus has shifted to the threat of chronically low inflation.
But he adds: “We think it unlikely that Europe will turn into a Japan-like scenario, as we expect policy makers to act pre-emptively and implement unconventional policy responses, even if less pronounced than those implemented elsewhere in the world. This would be a positive development for risk assets such as high yield. We expect new issuance to continue to be strong, potentially driven by M&A and leveraged buyout activity which is likely to continue.”
EXPERT VIEW
Rob Morgan, pension and investment analyst, Charles Stanley Direct
Verdict
“Manager Barrie Whitman has a good, steady long-term track record and a relatively conservative approach compared to some managers in the sector some of whom have a bolder macro-economic approach. This fund has outperformed incrementally in keeping with value added through stock selection rather than top down allocation. The permanence of management and conservative investment process has rewarded buyers of the fund over the longer term and should continue to do so – though it may underperform in strong bull markets for the asset class. A solid fund.”
