The high degree of idiosyncratic risk in high yield bonds means good credit analysis is rewarded, making it fertile ground for active managers.
Broader opportunity set: The growth of the market is presenting more choice when constructing a portfolio. For example, in 2005, there were 216 issues in the European high yield market; by 2015, this had grown to 7553.
Under-researched issuers: Bonds trade over-the-counter (OTC) rather than on standard exchanges. The lack of transparency in the OTC market means exchange-traded funds (ETF) and larger investors are forced to focus the bulk of their trading activity on the larger issuers in the indices. This leaves a wealth of opportunities for active investors, such as Henderson, to identify value among the smaller underresearched issuers.
Ratings mismatch: Within the credit cycle, ratings agencies tend initially to review the larger issuers in the high yield market, taking time to progress to the smaller, often lower rated issuers, so can be slow to appreciate improvements among CCC-rated companies. Henderson, historically, has held a higher-than-benchmark portion of CCC issuers in its high yield strategies, believing that many of these credits are mis-rated. We also believe that since the financial crisis ratings agencies have sought to deflect criticism that they were too generous before 2008 by applying a cautious bias to ratings in recent years. Again, this allows good credit analysis to identify mis-rated opportunities.
Accessing the asset class
Henderson offers three strategies within the high yield space: global, US and European currency, as well as offering access to the high yield market through off-benchmark exposure in investment grade strategies.
A truly global approach
Unlike many global high yield funds, which are run solely out of one location, the Henderson global high yield strategy is run jointly by Chris Bullock and Tom Ross in London and Kevin Loome in Philadelphia, together with credit analysts on both sides of the Atlantic. As the high yield market expands globally, Henderson believes it is vital that analysts are closer to the companies they research.
High conviction portfolios
Henderson’s high yield funds are run as ‘best-ideas’ funds. Rather than attempting to replicate the indices against which the strategies are benchmarked, the portfolio managers, in conjunction with the credit analysts, choose their top 75-150 issuers to include in a portfolio. This makes for a high-conviction approach that captures the strength of our analytical expertise.
Flexible and active
We believe that credit selection and analysis are key to structuring portfolios but that top-down factors cannot be ignored. Henderson’s high yield strategies, therefore, asset allocate nimbly across ratings,
geographies and industries. Henderson is also adept at using derivatives, which can be used for hedging purposes or to express short positions.
Experienced team
The Henderson Global Credit team numbers more than 30 investment professionals with an average of 13 years’ experience. Its strong performance has led to several accolades and awards.
Tom Ross joined Henderson in 2002 and has been co-managing Henderson’s absolute return credit funds since 2006.