Fixed IncomeMay 18 2015

Fund Review: Kames High Yield Bond

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The £1.53bn Kames High Yield Bond fund is co-managed by Claire McGuckin and Philip Milburn with a focus on delivering the best total return on a risk-adjusted basis, primarily through investments in high-yield bonds.

Ms McGuckin notes: “The fund has a global mandate, which means we can access both the breadth and depth of, say, the US high-yield market but also the relative immaturity of the European high-yield market. We can adjust our allocation depending on what is going on in the broader market, which gives us more optionality and choices than more limited mandates.”

The manager notes the team is not seeking to generate alpha from duration or currency positions, “so we are really trying to do it from stock picking. As a result, all of the assets are hedged back into the base currency of the fund, which is sterling.”

Ms McGuckin adds: “While we are benchmark aware we are relatively benchmark agnostic, and refer more to peer performance than the direct benchmark because we are a stock-picking fund and the index has probably 1,500 issuers [while] the fund would have only 100-120. So the fund is built from a bottom-up stock-picking approach with [an] overlay of our top-down macro views informing those positions.”

The manager notes that while the team’s core belief is that selection accounts for approximately 80 per cent of what happens in the fund over the long term, “we have lived through some very interesting times in the past few years and clearly there have been points during the crisis when macro factors have superseded anything going on at an individual company level”.

She adds: “That systemic risk-on, risk-off persisted for quite a long time during the crisis and at times it is still the dominating factor, but we do feel we are gradually moving back to a more traditional idiosyncratic risk market where the performance of individual stocks will be a significant determinant of performance.”

The key investor information document for the fund’s sterling A accumulation share class shows a risk-reward level of three out of seven, while ongoing charges sit at 1.29 per cent.

For the five years to May 7 2015 the fund’s 41.71 per cent return outperformed the Investment Association’s Sterling High Yield sector average of 35.79 per cent, while the fund has also beaten the sector across one- and 10-year periods, according to FE Analytics data.

But the fund’s three-year performance lagged the sector slightly, with Ms McGuckin suggesting this reflects the fact “we are running with a little bit less risk than [other] people, [and] we [have] resisted the temptation to buy beaten-up credit just because of strong market technicals”.

She highlights the team’s discipline in relation to debut European issuers coming to market and being “incredibly selective in what we played within the energy space in the first half of last year”. Ms McGuckin also highlights the importance of a firm review process, noting it is “crucial when it comes to running high-yield money”.

One key change in the past 18 months has been the geographical weighting of the portfolio. “We have [taken] our US holding up to about 65 per cent of overall holdings, and that is likely to continue to edge upwards,” she explains.

“We strongly believe the US market offers more in terms of overall absolute yield at the minute. [Its] economy is in a slightly better place and the maturity of the market means that from a liquidity and beta perspective we think it is slightly more stable than the European one.”

The team’s response to this bullish view was to increase its exposure to the US energy sector in the fourth quarter of last year.

“While we didn’t have zero energy holdings going into the correction, we were relatively well positioned as our holdings were at the lower end of the risk spectrum in energy. [So we took the] opportunity to selectively add risk in the mid-tier high-yield exposure in exploration companies. We concentrated on the companies that had good liquidity, good assets and which we felt were likely to survive an 18-month correction in the sector.”

EXPERT VIEW

Martin Bamford, chartered financial planner and managing director, Informed Choice

This fund is one of our preferred options in the IA Sterling High Yield sector currently. It offers an attractive distribution yield of 5.5 per cent, is a significant portfolio valued at more than £1.5bn, and is very actively managed. The managers don’t closely track any benchmark, which gives them more flexibility. Risk controls are evident with a cap of 2 per cent on exposure to higher quality names, with even smaller caps applied for their more speculative investment ideas. One slight concern is the rapid pace in growth of the assets in this fund, from £500m in 2011 to around £2bn in all its guises today.