Despite the sell-off in high-yield funds, Aberdeen Asset Management has received an influx of money that the firm is investing in high yield, global high yield, emerging market corporates and Asia.
"High yield has challenges, but we often find opportunities in the larger, global high-income market. In the past, that has included, for example, media companies in Eastern Europe and structured credits among the U.K. pubs," said Greg Hopper, a senior portfolio manager with Aberdeen’s North American Fixed Income Investments. "We're cautious on loans because spreads are very low and any potential for capital appreciation has been taken away by incessant refinancings.”
Hopper spoke on alternative sources of income with colleagues Keith Bachman and Michael Anthony Tuesday at a conference hosted by Aberdeen at the Time Warner Center in New York City.
“We have some fresh funds coming into our strategy and we’re looking to invest it in weaker markets. We have seen meaningful inflows across high-yield emerging-market debt and Asia Pacific bonds,” said Bachman. “We’re not necessarily putting all that dry powder to work today, but we’re scaling in at these lower levels. We have been buying while most high-yield managers have been forced to sell to fund redemptions. We’re able to take advantage.”
First-quarter returns of 2.9 percent in the high-yield bond market represent the weakest performance to begin a year since 2008, according to Guggenheim Partners data.
"Whenever there’s a dip in the high-yield market due to exogenous reasons our investors pounce on the opportunity. They want to own this asset class because the default risk is benign," said Bachman, an Aberdeen senior portfolio manager and head of U.S. high yield.
"We are looking at the new issue market, anything that’s in the primary and secondary," he says. "Fundamentally, solid industrial companies, energy companies, telecommunications companies, wireless telecom are a big part of our high-yield portfolio and these are all credits positions where we look to employ cash top up and get back to something fully invested." The Scottish firm is attempting to bring down cash levels close to 1 or 2 percent in order to be fully invested.
"For investors who relied on core markets, such as sovereign and developed world sovereign markets, that had an average yield of 1.7 percent with a lot of volatility, they are now thinking beyond the traditional markets," said Anthony, head of Aberdeen’s fixed-income Asia Pacific unit. "In Asia, there’s an investment-grade average type of market with less volatility than emerging markets, but there’s plenty of opportunity in some parts of emerging markets. We still think these markets will add value above core sovereign markets."
Among emerging-market funds and ETFs, outflows were $2.8 billion over the two-week period ending June 5, and while emerging market debt funds and ETFs saw $414 million in outflows over the same period, new products continue to emerge.
“There’s been a couple of products out lately that are zany and not totally sustainable, such as an ETF issued offshore that invests in Chinese corporates, Chinese local governments and a number of global issues like Caterpillar,” said Anthony. “For Hong Kong investors, a Chinese offshore bond ETF accesses the Chinese appreciation, but we have access to the onshore market so we don’t need to buy offshore issued bonds at ridiculously low yields."
Meanwhile, the bank loan market saw returns of 2.4 percent during first quarter 2013.
"If I buy high-yield bonds and rates stay the same and the credit improves, I still get capital appreciation from that bond. That's not the case with loans. That’s why we are starting to prefer high-yield bonds to loans,” said Hopper. “We are also more cautious on European high-yield because we don’t believe that the roughly 20-basis-point increment in spread over the U.S. adequately compensates for the slower economy and less protective bankruptcy regime in Europe.”
European loans, however, may attract interest as the market evolves.
“They haven’t been as tradable as the U.S. because European loans are still largely held by European banks, but as the loans start being held by investors and are traded more, you could get a new market premium on it,” said Hopper. “They may present better relative value to European hig- yield bonds.”