Leveraged credit markets continue to offer pockets of opportunity for selective investors at this juncture. On a longer term view, these markets retain a strategic appeal for asset allocators. Relative to most other income generating assets, the shorter duration characteristics and often higher yields of floating-rate loans and high-yield bonds mean that they can add value not only in today's environment of low and negative yields, but also when interest rates eventually turn up.
Investors looking to add strategically to this area may wish to consider standalone floating-rate and high-yield strategies, which can be especially attractive as complements to portfolios designed to substantially mirror major fixedincome benchmarks. Alternatively, they may wish to opt for a multi-asset credit (MAC) strategy, a one-stop solution that effectively delegates cross-asset allocation decisions to a single investment manager.
Leveraged credit is likely to continue to find support in a low-growth environment where the sum of negativeyielding global government bonds is now around US$13 trillion (Source: Bank of America Merrill Lynch calculations in July). Even factoring in an expected pickup in corporate default rates (and lower recovery rates) at this point in the credit cycle, we believe investors are being adequately compensated for risk.
That said, US high yield and leveraged loan markets have, thanks to a strong rally since mid-February, moved closer to fair value. Investment in this area of the market requires a highly active, selective approach - targeting the pockets of opportunity that exist.
On a longer term view, leveraged credit retains a strategic appeal for asset allocators. Its two sectors - floating-rate loans and high-yield bonds - occupy a special capital market niche. Relative to other income generating assets, their shorter duration characteristics and often higher yields mean that they can add value not only in today's environment of low and negative yields, but also when interest rates eventually turn up.
Investors looking to add strategically to this area may wish to consider standalone floating-rate and high-yield strategies - which can be especially attractive as complements to portfolios designed to substantially mirror major fixed-income benchmarks - or via a multi-asset credit (MAC) strategy. The low correlation of loans and high-yield bonds with traditional fixed-income debt also means that a MAC strategy having a substantial allocation to leveraged credit can serve as a convenient cornerstone for diversifying a traditional fixed-income portfolio.
Investors and their advisers who are considering either standalone credit asset class strategies or MAC options need, as part of their due diligence process, to ascertain whether the investment manager offering the strategy has the requisite expertise in the underlying asset class or classes. Eaton Vance's credentials in this regard are very strong. Few income-oriented managers can match the experience, expertise and professional continuity of our dedicated income sector investment teams.
Our investment professionals helped shape the historic growth in the US of the floating-rate loans and high-yield bond sectors, and our high yield and floating rate loan strategies have demonstrated unequivocally that they can add value over different cycles. Our investment approach combines bottom-up, fundamental credit research - employing quantitative and qualitative tools to generate proprietary views on value - with systematic risk-weighted portfolio construction. Our investment time horizon, given our contrarian approach, is typically longer term, but we can also be nimble when shorter term, potentially high return opportunities arise.
Our US high-yield portfolios employ rigorous fundamental credit research and market-factor analysis to capitalise on inefficiencies in the high yield bond market. Via an opportunistic, value-driven approach, we seek to deliver consistent risk-adjusted performance with high information ratios and a favourably skewed up/down market capture. According to eVestment Alliance Peer Group Rankings as at 30 June 2016, our US high-yield composite ranks in the top quartile over 3, 5, 7, and 10 years.
Our global high yield strategy, incepted in July 2015, has also been faring relatively well. As at 30 June 2016, it had delivered 5.02% gross (4.5% net) since inception, ahead of the 2.25% USD hedged return for the BofA Merrill Lynch Developed Markets High-Yield ex-
Subordinated Financial Index over the same period (Source: Eaton Vance).
Our loan portfolios are conservatively managed. We endeavour to outperform the market on a risk-adjusted basis over full cycles, but with a strong emphasis on
limiting downside risk. To this end, our portfolios have a bias towards higher quality credits (we believe there is an
asymmetrical relationship between credit risk and return potential in this asset class) and are broadly diversified in terms of industry exposure and number of positions
(450-550 positions).
Our floating rate loan strategy is designed for investors who want a high, steady return - higher than that offered by investment grade bonds - but who also want to sleep at night. Performance will typically tend slightly to lag risk-seeking peers whose portfolios have a bigger emphasis on less liquid, more exotic credits. However, it is worth noting that whereas our strategy has survived many cycles, previous downturns have claimed the scalps of a number of opportunistic, risk-seeking strategies. The performance of our senior loan composite highlights our conservative approach. Over the year to 31 March 2016 - a generally difficult period for risk assets globally - the strategy held up well, returning -0.26% (gross of fees) versus -1.26% loss for the in S&P/LSTA Leveraged Loan Index. In the second quarter of 2016, a strong rally in lower quality areas of the index (second-lien loans and loans rated CCC and D) saw the strategy gaining 2.69% gross of fees, slightly less than the overall index
(+2.92%)
With financial market stability risks having risen and more volatility in risk assets likely, we believe Eaton Vance's tried-and-tested approach should continue serve investors well in a world where central bank-dispensed medicine
continues to fall short of stimulating real economic growth.
About Eaton Vance
Eaton Vance is a leading global asset manager whose history dates to 1924. With offices in North America, Europe, Asia and Australia, Eaton Vance and its affiliates offer individuals and institutions a broad array of investment strategies and wealth management solutions. The Company's long record of providing exemplary service, timely innovation and attractive returns through a variety of market conditions has made Eaton Vance the investment manager of choice for many of today's most discerning investors. For more information about Eaton Vance, visit eatonvance.com.
About EVMI
Eaton Vance Management (International) Limited (EVMI) is a subsidiary of Eaton Vance Management (EVM), a leading U.S. asset management organisation, and markets internationally the investment capabilities of Eaton Vance Management and its affiliates, including
Parametric Portfolio Associates, LLC. EVMI has been based in London since 2001.
This material does not constitute an offer or solicitation to invest in any Eaton Vance fund and/or products. Forecasts may not be attained. Past performance is no guarantee of future results. This material is communicated by EVMI, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority and located at 125 Old Broad Street, London, EC2N 1AR, United Kingdom, Tel. +44(0)203.207.1900.
EVMI is a wholly owned subsidiary of Eaton Vance Management (EVM). EVM is an investment advisor registered with the United States Securities and Exchange Commission (SEC) and is a wholly owned subsidiary of Eaton Vance Corp. (EVC). The nonvoting common stock of EVC, parent company of EVM, is publicly traded on the NYSE under the symbol "EV." For purposes of this material, "Eaton Vance" or the "Company" is defined as all three entities operating under the Eaton Vance brand.
EVMI markets the services of the following strategic affiliates: Parametric Portfolio Associates LLC (Parametric) is an investment advisor registered with the SEC and is a majority-owned subsidiary of EVC and Hexavest, which is an investment advisor based in Montreal,
Canada, registered with the SEC in the United States and which has a strategic partnership with Eaton Vance, who owns 49% of the stock of Hexavest Inc.
In Singapore, EVMI has a wholly owned subsidiary, namely Eaton Vance Management International (Asia) Pte. Ltd. (EVMIA), 8 Marina View, Asia Square Tower 1, #07-05, Singapore 018960, which holds a Capital Markets License under the Securities and Futures Act of
Singapore (CMS100185-1), is an exempt Financial Adviser pursuant to the Financial Adviser Act Section 23(1)(d) and is regulated by the Monetary Authority of Singapore. This document is to be distributed to Accredited Investors ONLY (as defined in the Securities and Futures Act, Chapter 289 of Singapore).
In Australia, EVMI is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of the provision of financial services to wholesale clients as defined in the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission's Class Order 03/1099. EVMI is registered as a Discretionary Investment Manager in South Korea pursuant to Article 18 of Financial Investment Services and
Capital Markets Act of South Korea.
EVMI utilises a third-party organisation in the Middle East, Wise Capital (Middle East) Limited (Wise Capital), to promote the investment capabilities of Eaton Vance to institutional investors. For these services, Wise Capital is paid a fee based upon the assets that Eaton Vance provides investment advice to following these introductions.
The views expressed in this material are those of the authors and are current only through the date stated at the top of this page. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund.
This material may contain statements that are not historical facts, referred to as forward-looking statements. An investment's future results may differ significantly from those stated in forward-looking statements, depending on factors such as changes in financial markets
