Euro corporates in better shape than investors think, says top HY manager
Aberdeen’s Paul Reed explains how to avoid getting burned in the European high yield bond market and criticises managers who opted for high cash levels over past few months.
by Chris Sloley on Jan 27, 2012 at 12:45
European corporates are in better health than many give them credit for but companies with strong ties the emerging markets will really prosper, according to Aberdeen’s Paul Reed.
The Citywire A-rated manager, who runs five high yield bond funds, said many investors are operating under the misconception all European debt is the same. And, he said, investors are missing opportunities in companies ready and able to tap into emerging market growth.
‘In terms of corporates, we have some Italian and Spanish exposure,’ he said. ‘There are a couple of Italian companies which have done quite well, one of them does most of its business outside the country, while the other is an Italian lottery company, which sells lotteries to other country markets.’
‘Meanwhile, in Spain, the companies we have don’t have the majority of their business exposure there. Instead they are doing it more in the Latin American countries, such as Argentina and Peru. This includes food distribution firms and we have alternative energy companies, who also have most of their business outside of Spain.’
Reed said this was part of a concerted effort to play the European bond market by looking for companies willing to create a global presence.
‘We are looking for companies which are not hugely domestic and are more international, in that sense,’ he said. ‘The more they are facing emerging markets, and also the Far East, the better they are positioned.’
Critical of cash holders
In terms of the high yield sector as a whole, Reed offered a critical view of some managers who have opted to hold large amounts of cash over the past few months. Reed said, despite it being a difficult year, this was counter-productive.
‘Funds in our space had an awful lot of cash, far too much cash, a month or two ago. Somebody said to me in October ‘I am in the highest of high yield and cash’ and I suggested that is not how you are going to profit at all. If the markets rallied you are on the wrong side of it.’
‘If you are going to make some money you cannot take your edge out of the top end, and a lot of funds are quite nervy and are simply hiding away in the index while running away from risk,’ he said.
Discussing his sector allocation, Reed said he was encouraged by financials and said the Bank of Ireland – his fourth biggest holding – had performed particularly well as of late.
‘Financials are rallying very well at the moment and we have a number of banks in there which have been doing very well ever since the financials started getting downgraded,’ he said.
‘We had nothing in banks 18 months ago and we have concentrated, I mean there are a lot of European banks in the index, but we have concentrated on just a few, like Lloyds and Bank of Ireland and AIB.’
Reed’s best performing fund over the past three years has been the Aberdeen Global – Select High Yield Bond portfolio, which has returned 133.28%. This is while its benchmark, the BofA Merrill Lynch Global High Yield All Europe, has risen 106.65%.
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