Baring High Yield Bond Fund reaches USD1bn milestone
The Fund has outperformed its peer group in the year-to-date period, returning 8.7%, net of fees, while long-term investors have seen returns of 13.6% over the past three years*.
Ece Ugurtas, Investment Manager of the Baring High Yield Bond Fund, says: “The success we have had with the Fund reaching this significant $1bn milestone highlights how attractive this asset class has become for investors, particularly in the last six months. The record low yields on government paper in some developed markets, namely the US and Germany, has made it difficult for fixed income investors to find sources of income.
“High yield remains one area which continues to display attractive income-generating qualities for yield-seeking investors. We believe that macroeconomic factors are the primary market drivers, and an active approach to portfolio construction can be key in mitigating some of the market falls and delivering strong returns during continued market volatility.”
Asset allocation remains key. The Fund currently has its lowest exposure to the UK at 4.6% while European holdings stand at 9.1%, having been reduced from 14.9% in December 2011. As at mid-July, 59.6% of the Fund was allocated in US high yield assets, with 19.2% in emerging market high yield debt. Using cash to manage volatility, the Fund has increased its cash allocation from 4.7% in December 2011 to 7.6% in July 2012.
Ece Ugurtas continues: “Our allocation with regards to the European high yield market is a clear case in point of how we aim to make the most of market volatility. At the beginning of 2012, the Fund had more than 20% invested in European high yield and this position was a major source of positive returns in the first quarter as the market rallied following the announcement of the European Central Bank’s long-term refinancing operation, which strongly supported risk assets.
“As a result of this strong performance from the European high yield market we decided to take some profits in the second quarter and significantly reduce our allocation to the region. Hopes of a swift resolution to the Eurozone crisis have subsequently dissipated and European high yield now accounts for less than 10% of the Fund, with the euro exposure fully hedged back to US dollars. We expect the uncertain political and economic backdrop in Europe to continue to drive a degree of volatility in the market and remain highly selective in terms of exposure to Europe, focusing instead on the US and emerging world.”
Barings believes that market fundamentals - such as low corporate default rates of around 2% - will remain sound. While it is not possible to rule out short term volatility as investors switch between an optimistic and pessimistic view of the world, Barings expects the high yield corporate bond market to continue to offer an attractive level of income and the potential for long-term capital appreciation.
Ece Ugurtas concludes: “High yield bond valuations continue to price in excessive defaults; however, global high yield default rates remain low and below the long-term average. We expect this environment to persist as firms have deleveraged and have been prudently managing their balance sheets. This is the case particularly in the US which accounts for around two-thirds of the global high yield market. We are also finding opportunities in the emerging world where we believe the outlook for economic growth and corporate profitability is substantially more positive.”
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