2018 outlook for global high yield: bonds without borders

22/11/2017

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In 2018 Tom Ross, Co-Manager of the Global High Yield Bond Strategy, expects to see a continuation of cross-border issuance and for smaller issues to offer some of the best opportunities in the market.

What lessons have you learned from 2017?
The lesson I have learned from 2017 is that it is worthwhile investing time in relationships. The merger of Janus Capital and Henderson Global Investors meant changes to the management of the bond team in the US. We realised that for the integration to be successful, we had one to two months to get it right. Global high yield is the area in which this was most pressing because we have always had two portfolio managers on both sides of the Atlantic. Seth Meyer, who joined as Co-Manager from Janus in Denver in the US, had to pick up the co-management and understanding of this portfolio very quickly. It helped that we were able to spend some time together getting to know one another’s investment style prior to the merger and have since been able to roadshow together in Europe to showcase our credentials.
 
What are the key themes likely to shape the markets in which you invest in 2018 and how is this likely to impact portfolio positioning?
We expect to see an increase in idiosyncratic risk in 2018. We have already noticed this in the second half of 2017, starting with the volatility in the telecoms sector in August, as merger and acquisition rumours and stories were rife. Towards the end of 2017, we have seen pharmaceutical company Teva downgraded to high yield by Fitch, Petroleos de Venezuela (PDVSA) commence restructuring proceedings, and volatility re-emerge in the technology, media and telecoms sectors. The wider spread dispersion that may result from this volatility should create more opportunities for a selective approach.
 
US issuers in the European high yield bond market have grown from just over 6% in early 2016 to 12% in late 2017*. The European market offers a more cost-effective means of financing, given the lower yields in the European market compared with the US market, so we would expect US issuers to continue to cross the Atlantic in 2018.
 
*Source: ICE BofA Merrill Lynch European Currency Non-Financial 2% Constrained Index (HPIC) as at 14 November 2017
 
Where do you currently see the risks within your asset class and where are the most compelling opportunities?
The Janus Henderson merger, and the bringing together of the two credit research teams into one function, presents great opportunities for us. Unlike many fixed income houses, we have taken a conscious decision to ensure that all of our credit analysts are sector specialists across the capital structure. We view the cut-off point between investment grade and high yield as arbitrary and believe that dividing credit analysts into two separate teams of investment grade and high yield risks missing opportunities. We, therefore, expect our credit analysts to continue to seek out potentially rising star candidates (those bonds that could be rerated from sub-investment grade to investment grade). Being sector specialists focused on relative value also allows us to identify potential cross currency relative value trades in the larger issuers that issue in more than one currency.
 
Smaller names are often overlooked by the largest high yield houses and by exchange-traded funds, which because of their size have to focus only on the largest most liquid issuers. We continue to believe that there are a number of smaller, under-researched lower-rated names that can continue to present opportunities. For example, the UK retail sector is facing challenges on two fronts. In the first instance, bricks and mortar focused retailers continue to struggle in the face of rising online sales. Second, the UK consumer is suffering from lower growth and higher inflation than elsewhere in Continental Europe following the June 2016 Brexit vote. Despite this challenged sector, there are credits that we continue to like. For example, we remain comfortable with our investment in pure online retailer Shop Direct as well as the leading UK branded pizza restaurant, Pizza Express. Experiences, such as eating out, are holding up better than material purchases (pure retail) although bond prices have suffered as investors are viewing the risks to consumer-facing sectors as similar.

These are the manager's views at the time of writing. Security examples are for illustrative purposes only. Janus Henderson Investors, one of its affiliated advisers, or its employees, may have a position in the securities mentioned. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Janus Henderson Horizon Global High Yield Bond Fund

This document is intended solely for the use of professionals and is not for general public distribution.

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Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Janus Henderson Investors (Singapore) Limited, 138 Market Street, #34-03 / 04 CapitaGreen Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent. RBC Investor Services Trust Hong Kong Limited, a subsidiary of the joint venture UK holding company RBC Investor Services Limited, 51/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong, Tel: +852 2978 5656 is the Fund’s Representative in Hong Kong.

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  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
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  • The value of a bond or money market instrument may fall if the financial health of the issuer weakens, or the market believes it may weaken. This risk is greater the lower the credit quality of the bond.
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