Fixed Income  

Bezalel slashes high-yield exposure

Bezalel slashes high-yield exposure

Jupiter’s Ariel Bezalel has slashed his high-yield weighting amid “mounting evidence” that the US credit cycle has gone into reverse.

The Strategic Bond fund manager has turned increasingly defensive as the year has progressed and has funnelled money from more cyclical positions into government bonds.

Mr Bezalel pointed to waning fundamentals in the US corporate bond market and the growing risk of a global slowdown as reasons for his caution.

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“Everywhere we look there is mounting evidence that the US credit cycle has turned, across both high yield and investment grade,” he said.

“It is not just energy; there are a lot of sectors where fundamentals have deteriorated.”

The manager’s £2.6bn fund has around 30 per cent in non-financial high-yield debt, down from 50 per cent, and Mr Bezalel said the weighting would fall further in the coming weeks.

“We have a number of names redeeming next month, and we will not be looking to high-yield [replacements],” he said.

“A lot of it is going to run off in the next year because it is pretty short-dated and defensive.”

Spreads on US credit have widened materially in recent months, with the high-yield market not helped by its relatively high proportion of energy stocks.

Last month was the worst in four years for high-yield returns, according to TwentyFour Asset Management, and spreads between high-yield debt and US Treasuries now stand at 6.5 per cent.

Mr Bezalel said price activity in the US, coupled with the ongoing troubles in emerging market debt – driven by falls in emerging market currencies against a strong dollar – meant he was also more cautious on European corporates in spite of improving fundamentals.

“As emerging market and US spreads widened, Europe was always likely to follow suit and it has started to do so,” he said.

More cyclical holdings to which Mr Bezalel has reduced exposure in recent months include oil rig company debt – which once accounted for 10 per cent of the portfolio but is now just 2 per cent – and contingent convertible bonds.

He continued to favour certain financials but said he had become more selective.

Most of the manager’s exposure is in bank debt issued by UK firms such as RBS, Barclays and particularly Lloyds.

But the focus of Mr Bezalel’s recent attention has been on increasing his government bond weighting. His fund holds 30 per cent in government debt, with US Treasuries the core of this holding.

The Treasuries position has been scaled up of late, due to the manager’s belief that the US Federal Reserve will be forced into a U-turn on its interest rate policy.

He said: “I think the Federal Reserve is going to flip. It will eventually realise it cannot raise rates [because of the growth outlook].

“When it does flip, which could be a while, I think you will get a rally at the short end of the curve. I have been buying a lot of paper at around the five-year mark in anticipation that [the Fed] will realise it cannot hike.”