Positioning the portfolio amid recession fears
In late April, Tell Media Group, in cooperation with Jupiter Asset Management, PGIM Fixed Income and Royal London Asset Management, organised a roundtable discussion at Hotel d’Angleterre in Copenhagen with Danish investors, focusing on high yield bonds.
The discussion started out with Caroline Liinanki asking the investors about their current exposure to high yield and how the allocation has changed in recent years.
ANDERS ELLEGAARD: “We have a strategic allocation to high yield and we believe it brings value to a diversified portfolio. Since I joined Industriens Pension some six years ago, we’ve slowly moved some of our high yield exposure to alternative credit as we’ve found the risk return profile more attractive in the illiquid part of the market. This has meant that we’ve moved from an allocation of some 7 per cent of assets to some 4 per cent today.”
THOMAS WALTHER JØRGENSEN: “We also have a strategic allocation to high yield and as of today, we have some 3 per cent of AUM allocated. We’ve also increased our allocation to private credit over the last couple of years but not at the expense of high yield. We view private credit as an attractive supplement to a diversified credit portfolio.”
NIKLAS TELL: ANDERS, ARE YOU STILL HAPPY WITH THE SHIFT FROM HIGH YIELD TO ALTERNATIVE CREDIT?
ANDERS ELLEGAARD: “We’re still happy with that move. That said, we’ve always had exposure to high yield and it probably doesn’t make sense to reduce the exposure further. It’s more liquid and we need to have some liquidity in all our asset classes.”
NIKLAS TELL: JONATHAN, WHERE DO WE STAND RIGHT NOW WHEN IT COMES TO OPPORTUNITIES IN HIGH YIELD?
JONATHAN BUTLER: “I would say the answer will depend on the timeframe. On the positive side, there’s yield in the high yield markets again. In Europe, we had a 4 per cent yield at the beginning of last year and that’s now 8 per cent so that’s clearly better. That said, there are obviously some global economic threats out there, including the risk of recession. In the short term, we expect to see more volatility but as an active manager, we think it will be an interesting time going forward as we will see more dispersion.”
ADAM DARLING: “I agree. I think it has been a volatile market for the last couple of years. We had extreme stimulus during Covid and now markets are starting to figure out what the end of that will mean for risky assets and high yield is part of that discussion. We think we will go into a recession and the repricing in markets from the yields we used to have to the yields we have today causes stress for certain companies. I agree that this should be a good market for an active manager. If we do our job well, we should welcome increased volatility and we should welcome a higher level of defaults because that provides more opportunities.”
NIKLAS TELL: IS THE MARKET OVERALL PRICED AS IF WE WILL HAVE A RECESSION?
ADAM DARLING: “I would say that high yield credit spreads are not. Jonathan mentioned that we’ve seen volatility and in the middle of last year, Europe was priced for an apocalypse. Right now I’m surprised at the complacency around some areas of the market because there are a lot of risks out there. Our view is that we will move into a recession as the year progresses and we therefore need to ask if there’s enough margin of safety in what we’re buying.”
JONATHAN BUTLER: “I think there’s too much belief in the ECB and Fed being able to engineer a soft landing and avoid recession. They only have one tool. They don’t have a steering wheel – they have a hand break and that makes it challenging. The markets hope that the central banks will pivot before we reach a recession but if you read what they’re actually saying, they are very much focused on getting inflation under control.”
AZHAR HUSSAIN: “I very much agree with what has been said already. From a traditional credit cycle point of view, we’re late stage but there are a few differences compared to history. We’ve had a cleansing in the public markets during Covid and that puts high yield from a fundamental perspective in a much better place if we’re going into a recession. That means that we should be fairly confident that defaults will be lower compared to history. The quality of the companies is better, there are more double B and less triple C companies and the equity cushion is bigger. It’s a different market compared to what it used to be. What we don’t know is the technical element. We don’t know how markets will react. In the short term, we might therefore see spreads widening but long term I’m confident that high yield as an asset class should do pretty well.”
ANDERS ELLEGAARD: “I agree with the long-term outlook but I also think that we’re most likely entering a recession and from a technical point of view that will probably mean widening spreads. It’s, however, a difficult thing to time so I wouldn’t go underweight now because then you risk missing coupons and further appreciation. That said, there will probably be a point in time in the near future when there could be reason to add to your exposure.”
THOMAS WALTHER JØRGENSEN: “I would say that high yield is a good asset class in general and the quality of companies issuing high yield is much better today compared to some 10 or 15 years ago. We have an allocation to both US and Europe and we don’t see a need to change that. Today we have a neutral allocation and if spreads are widening significantly, we’re in a position to increase that allocation.”
The roundtable discussion was published in issue 03, 2023 of Nordic Fund Selection Journal. A PDF of the complete story can be found here.
//Participants
- THOMAS WALTHER JØRGENSEN, Senior portfolio manager, Velliv
- ANDERS ELLEGAARD, Head of fixed income, Industriens Pension
- ADAM DARLING, Investment manager, fixed income, Jupiter Asset Managementi
- JONATHAN BUTLER, Co-head of the global high yield strategy and head of the European leveraged finance team, PGIM Fixed Income
- AZHAR HUSSAIN, Head of global credit, Royal London Asset Management
