The aim of this £189.2m Hermes Global High Yield Bond fund is ultimately to beat the returns of the global high-yield market, manager Fraser Lundie says.
The fund reached its fifth anniversary on May 11 2015, and its investment process has remained consistent. Most of the credit team at Hermes – particularly the duo of Mr Lundie and Mitch Reznick – has been working together for more than a decade.
Mr Lundie explains: “The process starts with a top-down construct, which is the output from our monthly credit strategy meeting where we go through what we perceive to be the major drivers of credit appetite. [It comprises] all the things you’d probably expect from a top-down point of view in terms of balance sheet health, earnings, funding and liquidity, and so on.”
The result of the meeting – which also looks at the relative value of credit – is “a conclusion on where we want to allocate capital within the wider universe”, he says. This includes geography, the sector, ratings categories and which parts of the interest rate and spread duration curves to target. “That gives us two things: First, an overall construct of how we’d like the portfolio to look, and second it acts as a filtering device for us to then go away at an analyst level to look for bottom-up ideas to fill out the shape of the portfolio we’d ideally like to have,” Mr Lundie says.
This analysis is then put to the credit committee, which scores the credit on fundamentals and relative value to produce a final score of between one and five. He explains: “It could be the best credit in the world, in which case it would be one out of five on fundamentals, but if it’s priced to perfection then it would be five out of five on relative value – so the final score could be a three. The way we look at the world is that everything should be a three if it is priced correctly to its risk, so we are looking to populate the fund with ones and twos in the areas of the market that we like.”
These ideas are then presented to the risk management meeting, which “slices and dices” the risk in the portfolio. He notes: “This meeting completes the circle and makes it dynamic and continuous. It is the threefold process of credit strategy, credit committee and bottom-up ideas and then risk management, which we’ve done for 11 years or more.” However, the manager points out the process has not remained completely static as “there is always going to be an element of evolution in terms of the way the market and technology evolves”.
The fund sits at level four out of seven on a risk-reward scale for the F-sterling hedged accumulation share class, while ongoing charges are 0.79 per cent, its key investor information document shows.