Best in class: Man GLG High Yield Opportunities

In a strange way, 2020 was the year many bond funds were waiting for. Clearly there were risks, but after years of dearth there were suddenly plenty of opportunities abound – the sweet shop was very much open for business, particularly in the high yield space.

During the sell-off in March, JP Morgan’s Default Monitor was projecting default rates in excess of 10 per cent for the high yield sector in 2020. We also saw a raft of “fallen angels” – such as Ford, Kraft and Mark & Spencer - which had been downgraded from investment grade to sub-investment grade.

From the lows in March 2020, the average fund in the Sterling High Yield Bond sector had returned 28 per cent by the end of the year

But the increased issuance of bonds, coupled with the Federal Reserve committing themselves to buying fallen angels, served as a re-assurance to the market – not to mention the long-term opportunities managers could find in companies that could grow in a post-Covid world.

From the lows in March 2020, the average fund in the Investment Association Sterling High Yield Bond sector had returned 28 per cent by the end of the year.

Today we would argue things are a bit tougher, with the easy money having been made.

But with companies having to make wholesale cuts to dividends, the attraction of the sector is still there. However, finding an active manager with the experience and tools to take advantage of this is not so simple; fortunately that is where this week's fund excels.

The Man GLG High Yield Opportunities fund is managed by Michael Scott, who was recruited from Schroders in September 2018.

Scott has an exceptional track record in this market – his High Yield mandate at Schroders returned 65 per cent, compared to 40 per cent for the sector, during his tenure.

This is an unconstrained global high yield bond fund. Scott has a ‘go anywhere’ approach and looks for mispriced opportunities from across the speculative end of the market and trades them, both buying opportunities he thinks are too cheap, and also shorting some he thinks are too expensive.

Mike achieves this through bottom-up stock selection, but with each idea assessed through a top-down lens. In practice, this means he finds interesting opportunities first, then sees what macroeconomic trends would help or hinder them.

His investment universe starts with around 1500 names. This is initially reduced through a series of quantitative metrics to find attractively priced ideas. From this list, Mike will conduct more thorough analysis, to reduce the names to a watchlist of 100-150 companies with good fundamentals and macro tailwinds to support a recovery in price.

The final portfolio consists of 60 to 80 holdings. These positions will be weighted depending on how compelling the opportunity set with reference to which sector or country they are in, the liquidity, the seniority of the debt and what difference each idea will make to the rest of the portfolio.

Scott is happy to run one of the riskier funds in the sector at this point in the credit cycle, by targeting distressed bonds low down the credit spectrum but with a chance of recovery.

The flexibility of his mandate means he can take a lot diversification with his holdings, which should help spread the risks. The ability to short bonds does add to the overall risk profile of the fund, though should enable it to benefit somewhat in falling markets.

The typical holding period is around one year, so positions can turn around quickly, especially in the more opportunistic trades, which gives an overall portfolio turnover of around 75-80 per cent.

Since its launch in December 2019, the fund has returned 30 per cent (vs 10 per cent for the sector). The fund has an ongoing charge of 0.75 per cent and a running yield of 6.85 per cent.

Scott has demonstrated excellent stock picking ability throughout his career, and we feel he is perfectly positioned to take advantage of opportunities in a unique time for the asset class.

Darius McDermott is managing director, FundCalibre