With events in China and Greece combining with low oil prices to send volatility tremors through the market, many investors have taken risk off the table and are hoarding historic levels of cash.
But while Harwood CIO Philbin has also pared back his equity weightings, he is eyeing up some opportunities in an area of the market that is not currently in wider investor favour.
“Volatility is rising quite rapidly, and it is difficult to pinpoint one driver,” he said. “Because of that uncertainty we are taking risk out of the unit trust portfolios and allowing our cash positions to rise, rather than throwing ourselves into it.
“Contagion and diversity risk are increasing, which is giving less opportunities to create a portfolio with greater diversity, which is both interesting and scary for us in equal measure.
“I am getting more interested in Asia as an asset class, but finessing on the timing will be needed. The China fallout will definitely impact on that, and while I am not going in yet, high yield in particular looks very attractive.”
Disinterest rate
Investor reticence over high yield bonds stems from concerns around increased risk, particularly considering the impending interest rate hikes.
However, Philbin believes that present spreads are too good an opportunity to miss, and, given the low number of corporate defaults in recent years, intends to put some money into the EM high yield space.
“Some of the emerging market debt funds are looking very attractive as long as you accept some of the short-term volatility,” he expanded. “Historically, low interest rates coupled with a broadly recovering global economy means there are some opportunities out there.
“We are doing a lot of work on Asian income at the moment – both equity and debt – because there are some products out there on 5-6% yield, though we will wait until market volatility dies down.”
US high yield ex-energy also features on Philbin’s list of potential investments, with his preferred funds being Aviva Investors High Yield Bond and JPM Income Opportunities.
He said: “The average yield is 700 basis points, which is definitely in recession territory, and when the oil price drops the spread on US high yield gets wider.”
While Philbin has cut back his equities as a whole, his Japan holdings in the Discovery Managed Growth and Elite Hasley Multi Strategy Portfolio II funds remain relatively high at 15% and 25% of the funds’ respective overall equities exposure.
“I am not taking anything out of Japan, which still has great long-term prospects,” he said. “Also, the oil price is back below $50 a barrel, and Japan is massive oil importer. So while we have taken money out of equities in general, we favour Japan and our relative Japanese weighting is increasing.”
