Global emphasis
“Normally, it would take that money and give a special dividend to shareholders, but in today’s world it is all about being conservative and taking the money and tendering for bonds. It is a good credit story because they are benefiting from dollar strength in that they are selling beef in dollars.”
The Multi Strategy Credit and Absolute Return Credit funds both look across investment grade, high yield and loans, with an emphasis on large global companies.
For Lundie, the former fund is relatively unique in its field in that it has little dependency on a negative correlation with rates.
“When you look at the attribution over the past three years, a lot of the performance has come from periods of big sell-offs and volatility because its defensive bucket has been credit dependent,” he says.
“Through reverse enquiry we decided to try and make the Absolute Return Credit Fund [in June 2015] out of the concept of the defensive bucket, adding on to it some more investment-grade income-related trades.
“The idea is to try and achieve positive absolute returns on a rolling 12-month basis and therefore, in my opinion, be genuinely absolute return.”
There is a crossover in ideas across the three portfolios, and Lundie is keen to stress that the top-down picture looks the same in terms of geography, sector, quality bias, interest rate bias and spread duration bias.
Multi-strategy
A key point on Multi Strategy Credit in particular is that it remains concentrated in between 50 and 75 names, something the team at Hermes believes differentiates them from some of the more sizeable competitors, who also run larger teams of analysts.
“If you have 500 holdings, there is no need for any analysts because getting a name wrong when you own 500 names means nothing,” Lundie says.
“That’s the irony of the market, particularly high-end institutional where people will not buy you unless you have an army of analysts around the world, but they are quite happy to run hundreds of names in that portfolio and it doesn’t matter at that point.”
Hermes is also wary of letting this fund become too big, and therefore compromising on performance.
“I don’t think you can run this beyond $1.5bn (£1bn), because at single security level – and not wanting to own more than a certain percentage of a single issuer – it becomes inappropriate beyond that number,” Lundie explains.
“We tend to run Multi Strategy long the market, at 66%. That 66% has historically been able to make 80% plus on the upside because we are getting a significant amount of alpha bottom-up. We are among very few players who are committed to maintaining that bottom-up product offering.”
Broadly, Multi Strategy Credit is split 30% in investment grade and 70% in high yield, reflecting renewed popularity in the latter.
Lundie says the demand for high yield has not necessarily been just valuation driven, while his experience so far this year suggests investors are selling out of Europe to buy more globally diversified credit. However, he does believe high yield “ticks all the boxes” from a multi-asset point of view.
“Investors are looking for yield in a low-yield world, and they are looking for something that is not particularly correlated to rates or equities. That is truer in high yield than in other assets with lower correlation over the long term,” he says.
“Investors also want something that is liquid. There are not so many asset classes out there that can tick those boxes, and therefore as we move towards more of a multi-asset world, what used to be constrained as a smart benchmark-type allocation to high yield – maybe at 2-3% – is now whatever you think is appropriate.”
