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‘Vested interests’ are deluding high-yield investors, Hermes warns
by Robert St George on Sep 18, 2013 at 09:37
He further expressed caution about the losses that would be incurred by those purchasing bonds at 6% over par when they could automatically be bought back at only a 4% premium.
Those without call options were typically ‘fallen angels’, Lundie added, referring to investment-grade debt that had been downgraded.
However, as avoiding callable bonds deprived him of the bulk of the market, Lundie has instead turned to credit default swaps. ‘They have a bad name because they were used for all the wrong reasons,’ he acknowledged, ‘but now they’re an extremely valuable risk mitigant.’ For example, they have no interest rate risk because they are ‘just a contract’, they are highly liquid, and they are not taken out at a premium.
Lundie’s final strategy was to tap the global high-yield market, rather than sticking to just one geography or sector. This stood distinct from those who highlighted low default rates as evidence that the entire high-yield arena was in good health. ‘It is now less about getting the company risk right,’ Lundie contended. ‘It’s about getting the security risk right. Finding good companies is no longer good enough.’
Broadly, Lundie concluded, ‘Keeping it simple doesn’t work anymore.’
Since its inception in May 2010, Lundie’s Hermes Global High Yield Bond fund has generated an annualised return of 11.4% compared with its benchmark’s 9.9%. He also underlined that in August the fund had marked 14 consecutive months of outperformance against the index, which he insisted proved that ‘we’re not punting the market’.
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