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.