High yield veteran Michael Della Vedova is looking at the European secondary market for opportunities as he believes first time issuers’ ultimate returns are increasingly less attractive.
Speaking to Citywire Global, the T Rowe Price manager said he has become more cautious on new issuance over past two months.
This has seen the London-based manager focus his European High Yield Bond fund on selective names, as 45% of the new issuers in Europe last year were first time issuers. This is while looking for more tested stories paying a better coupon.
‘We will see a record of new issuances this year, the majority of them being first time issuers with no track record with investors. There’s a lot of demand for these products and this tells me we have to be more cautious,’ he said.
The manager is also wary of the returns paid by first time issuers. ‘I don’t think that an investor gets fully compensated for the long-term risks involved in these new issuances. I currently prefer to pay slightly more for the bond and get a better coupon,' he said.
In terms of credit quality, Della Vedova has a strong preference for B-rated names (33% of the portfolio), as he believes the premium still compensates for risk.
‘B-rated companies are underrepresented in the market. They are the fastest growing area of the high yield sector and offer great opportunities not only from existing issuers but also from first time ones,’ he said.
Overweight cable and wireless
Elsewhere in the fund, the manager boasts a strong overweight positions in the cable sector (7.7%). He owns Dutch firm Altice, German group Unitymedia and Paris-based Numericable among his top ten holdings.
‘The cable sector in Europe is not just about television. It is the best way to be constantly connected to the internet. It also allows you to be selective on what jurisdiction you want to have exposure to, as licensing is on a country-to-country basis,’ he said.
Della Vedova is also overweight the wireless sector (6.6%) and holds UK business Arqiva. ‘Arqiva is a very important part of the UK infrastructure to support the communication of data. The company generates a significant amount of cash,’ he added.
On the opposite end of the spectrum, Della Vedova is underweight automotive companies, as he sees the market already pricing-in a recovery of these businesses.
‘The automotive sector is dominated by the so-called fallen angels, companies such as Peugeot, Renault and Fiat, which are still very weak but slowly recovering,’ he said.Della Vedova returned 17.3% over the last year, 4 percentage points more than BofA Merrill Lynch Euro High Yield TR index over the same timeframe.