TwentyFour Dynamic team make high-yield bet

Chief executive and portfolio manager Mark Holman noted the quest for income had seen the team investing in European high-yield bonds, as well as making “opportunistic” plays in the US space.

He said: “The world’s looking for yield; it’s a scarce commodity. Our payout is more than 5 per cent and we have been doing that for the life of the fund.

“High yield is an obvious place to look, [and] the sweet spot is in Europe.”

While US high yield – which has been shaken by its exposure to the troubled energy sector –made up less than 4 per cent of the fund at the end of April, its European equivalent represented 16.7 per cent.

Mr Holman attributed this to the fact that the US credit cycle was “a little bit more advanced”, while BB-rated offerings on the Continent still appeared attractive.

“A lot of readings point towards the European sweet spot in global high yield,” he said. “We don’t need to reach too far. BB is the perfect part of the universe to be in.”

The fund’s weighting to BB-rated debt at the end of April was 40.9%. This has seen the team add to a position in Gala Coral this year, in part because of what it judged to be its future prospects. He explained: “It’s in merger talks with Ladbrokes. If the merger goes through, we get a stronger entity, but if it doesn’t we think Gala will have an initial public offering.”

Other holdings in European high yield include shadow financiers such as Garfunkel, which buys consumer debt from banks.

The small number of plays made in US high yield include adding building materials firm Cemex to the portfolio.

Meanwhile, the team remains positive about exposure to banks, which made up five of the fund’s top-10 holdings and 25.6 per cent of the portfolio at the end of April.

“The opportunity we saw post Deutsche Bank [and the crisis the bank had in the first quarter of this year] on a risk-adjusted basis were the best risk-adjusted returns we could see,” he said.

“The banks are recapitalised in a really meaningful way. [They] moan negative yields are killing them, but they are not. In this environment the default rates are ultra low and defaults are how banks lose money.”

This attitude has seen the team add to a position in Nationwide – although other banks have acted as a bellwether in regions where the environment looks less attractive.

For example, the team has just one holding – Vedanta Resources – in Asia because of deteriorating fundamentals.

“If you look at the results of a bank such as Standard Chartered, the reason it was so poor is credit deterioration in places like India,” Mr Holman said.

Meanwhile, the team has been readying itself for the possibility of a Brexit, using a combination of hedging strategies, and cash levels of 15 per cent. This is despite the manager’s own concerns about having such a high allocation.

“Holding too much cash goes against our job of delivering income. But it’s handy to use your cash at the worst possible moment,” he said.

Over the past three years the TwentyFour Dynamic Bond fund has returned 16.5 per cent compared with 11.3 per cent from its peer group, the IA Sterling Strategic Bond sector, data from FE Analytics shows.