Corporate bonds in Europe are expected to be big winners after the European Central Bank’s bold moves yesterday.
If true, it will come as a needed boost to European bond markets. In 2016, the high-yield market segment in Europe has been experiencing a tightening of liquidity on concerns that there could be potential losses from the exchange rate if the euro remains weak, said Luke Ng, FE Advisory’s vice president of research.
“However, the accommodative monetary policies of European Central Bank are likely to provide some support to the asset class in general,” Ng said.
Against this backdrop, Fund Selector Asia compares two European high-yield funds – the AllianceBernstein Euro High Yield Portfolio and the Fidelity European High Yield Fund A-Euro.
Ng provides a comparative analysis.
The AB fund was launched in March 2010, while Fidelity has been in the market a decade longer, launching in June 2000.
The AB product is managed by the firm’s global fixed income and global credit team. The portfolio managers work independently from the credit, economic and quantitative research teams, but these teams provide internal recommendations and discussions to assist portfolio managers in making investment decisions.
“They primarily adopt a bottom-up credit selection approach based on quantitative and fundamental research, and construct the portfolio by incorporating the team’s top-down views that transform into the overall risk budget of the fund for country and sector allocation purposes,” Ng said.
The Fidelity fund is run with a strategy based heavily on the works of its credit research team, which is responsible for bottom-up research, Ng said.
Both AB and Fidelity pay strong attention to portfolio diversification, and the holdings are diversified into around 200 issuers. Both fund portfolios are mainly exposed to high-yield corporate bonds, with minimal holdings in sovereign or agency bonds.
“Both AB and Fidelity also pay strong attention to the liquidity of their underlying holdings, which is important for high yield investments, especially in a down market. Although some of the underlying holdings are not denominated in euro, these exposures are pretty much hedged back into euro,” he said.
In terms of investment grade, the AB fund has a slightly higher average credit rating of BB- compared to B+ for Fidelity.
|Instrument||AB (%)||Fidelity (%)|
Source: Firm’s factsheets from January 2016.
The AB fund also has a longer duration around 4.2 years than Fidelity, which has a duration around 3.2 years.
“Overall, both funds are generating similar yields at approximately 6%,” he said.
As of February 2016, the AB fund underperformed the Fidelity fund over a one-year period (-5.62% versus -3.64%). However, over a three-year period, AB outperformed with a 11.51% return compared to Fidelity with 8.96%.
While there are various factors that could affect the fund performance, which include country and sector allocation, currency and yield curve, credit selection seems to be the major source of contribution for both funds over the past years, Ng said.
“The AB fund achieved better gains in 2012 and 2013, as euro high yield spreads narrowed after the European debt crisis of 2011. In 2014, a default occurred in a holding of the Fidelity fund, namely the Phone 4u, which narrowed the yield of the fund by about 100 basis points,” he added.
The portfolio managers of the AB fund are Jorgen Kjaersgaard and Gershon Distenfeld, who specialise in European credit and high yield assets, respectively.
For Fidelity, the fund is managed by Andrei Gorodilov, who took over manager responsibility from Ian Spreadbury in February 2013. Gorodilov was the deputy manager of the fund prior to taking over his incumbent role.
“There are no obvious changes regarding the investment process and style before and after the manager change,” Ng said.
The annual management fee for the AB product is 1.2%. The ongoing charges (OCF) are 1.49%.
For Fidelity, management fees are 1.49% and the OCF is slightly lower at 1.39%.
Ng said the costs of the funds are generally in line with their peers.
Both AB and Fidelity have strong processes to guide their investment approaches, Ng said.
“Valuations of the asset class are not particularly expensive, and the accommodative monetary policies of the ECB shall provide some support to the asset class in general.”
At the same time, the US has started tightening its monetary policy. “In this context, apart from the individual fund consideration, we need to consider the potential of euro depreciation.”
Ng pointed out that foreign exchange conversion could affect the overall return in the euro-denominated funds.
“For Hong Kong investors, when they invest into the fund, probably in the euro asset class, they need to exchange the money into euro, and this may affect the overall return when they redeem the funds following the foreign exchange conversion into the local currency later. The depreciation would probably affect the overall return, although it won’t be reflected in the performance itself.”
Ng said it is hard for him to give a clear recommendation between the two funds, as AB has limited public information of its industry breakdown.
In the context of global market volatility, which is expected this year, the AB fund’s higher credit ratings may look slightly better than the Fidelity fund, given its higher downside protection risk, Ng added.