Jupiter’s Bezalel urges caution after high-yield fund freeze
A US-based high-yield credit fund’s decision to freeze redemptions has led to fresh worries over the health of corporate bond markets.
High-yield corporate bonds sold off last week after US manager Third Avenue said on December 10 it was suspending redemptions on its $788m (£521m) Focused Credit fund in order to liquidate the portfolio in an orderly manner.
The Third Avenue portfolio is even riskier than a typical high-yield fund, but the closure has renewed concerns over bond market liquidity - at a time when high yield is on course to post its first negative year outside of a recession on record, according to Goldman Sachs.
Commenting this morning (December 14), Mr Bezalel said: “Recent events justify why we have adopted [a] barbell approach of having our top picks across high yield (primarily European high yield), countered by high quality investment grade credits and a material position in high quality government bonds such as US Treasuries, Australian government bond and New Zealand government bonds.”
The Third Avenue fund had already suffered a reported $1bn in redemptions this year, and fund flows last week showed a continued flight from the asset class: investors pulled some $3.8bn out of high-yield bond funds and ETFs, the largest outflow in more than three months. On Friday US high-yield bond exchange-traded funds fell to their lowest levels since 2009 in response to the news.
Mr Bezalel, manager of the £2.6bn Jupiter Strategic Bond fund, warned there could be further pressure on the market, both in the US and Europe.
Having slashed his high-yield weighting earlier this year, citing “mounting evidence” the US credit cycle had gone into reverse, the manager added today: “We have been concerned about US high yield for some time, and have limited exposure to this market.
“Furthermore, the other concern we have had for a while is some sort of contagion to European credit as credit in emerging markets and US credit have continued to come under pressure.
“For this reason we have been reducing our European high-yield exposure and within our high-yield bucket we have been improving the quality and also preferring shorter-dated paper.”
The Third Avenue fund is more leveraged than the wider market, and was also focused on lower-quality high-yield debt, according to Jim Wood-Smith, head of research at Hawksmoor Investment Management.
He said: “At the moment we have a couple of isolated incidents in what appear to be funds specialising in really nasty bits of the market. Not just high yield, nor even junk, but distressed.”
But Mr Bezalel cautioned: “Leverage levels have been moving higher on the back of aggressive merger and acquisition activity and share buybacks as corporates in the US have been shifting their focus from repairing balance sheets to enhancing shareholder returns.
“This is to the detriment of credit investors. It’s also worth emphasizing that this is not just a commodities problem. We are beginning to see credits from a wide array of sectors come under pressure.”
Mr Wood-Smith, meanwhile, acknowledged the hunt for yield seen across all markets had led to undesirable outcomes.
“We all may think caveat emptor, but there is an inevitability that the lust for yield has led investors across all spectra of the market into things that they have not understood and should not have touched with a long pole dipped in dettol.”
