While the valuation shift in European high-yield had been “remarkable”, Coram director James Sullivan and board member Peter Geikie-Cobb said the US offered “lower duration, greater yield and a better quality of bond”.
Writing to investors this week, Sullivan (pictured) said the high-yield theme across Coram’s portfolios was all short duration to mitigate “undue risks” and was broadly split between Europe and the US.
“Since we bought into European high-yield the change in valuation has been quite remarkable, while on a risk versus reward basis, the US still remains worthy of inclusion within our mandates,” Sullivan said.
At its peak, about 7% of the Coram portfolios were exposed to high-yield bonds, around half of which offered exposure to Europe.
When selling out of the position, Sullivan said the European bonds had a weighted duration of about 2.8 years and a yield of 1.85% whereas the US holdings offered a 1.8 year duration and yield of 5.21%.
The growing probability of interest rate rises from both the ECB and the Federal Reserve was not the only reason for the decision, Sullivan added, noting the shortage of so-called junk bonds in Europe as companies improved their debt rating and left the high-yield universe.
“JP Morgan have estimated a further 8-10% of the benchmark could leave within the next six months” Sullivan said.
“For example, Tesco, a dominant constituent within the index after seeing its debt downgraded in 2015, is paying down £700m of its debt in order to strengthen its balance sheet. Telecom Italia, ArcelorMittal and ThyssenKrupp are just three more companies flagged as ‘rising stars’ and likely to vacate the HY universe in the foreseeable future.”
Despite the positive tilt of demand against supply, Sullivan said it was “time to move on”, and balance any potential benefits of the high-yield trade against the fundamentals of the assets in the portfolios.
