Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
UBAM - Global High Yield Solution is an innovative high yield fund. The fund offers exposure to the high return potential of high yield credit, while maintaining ample liquidity, broad diversification and a very low exposure to interest rates. The fund is actively managed, with the ability to vary the overall high yield exposure, its regional composition and its interest rate duration.
The fund's exposure to the high yield market is achieved by exclusively investing in US and European high yield CDS indices which has the benefit of exhibiting high levels of liquidity in all market conditions. This has been confirmed during several occasions in recent years including the height of the pandemic in 2020 and the VIX induced market sell-off in 2018 when volumes traded in CDS indices increased during such moments of market stress.
The fund is managed according to a top-down, macro driven process that is in line with the investment approach of all the funds managed by UBP's Global and Absolute Return Fixed Income team. The high liquidity provides the fund with flexibility to adjust positions in an efficient and timely manner, were it necessary to do so.
The three main differentiating features of UBAM - Global High Yield Solution versus a traditional high yield bond fund are:
- A full 5-year exposure to high yield spreads while maintaining a very low exposure to interest rates
- The very high level of liquidity in all market conditions
- No risk of early repayments, i.e. no callable features as in the high yield cash bond market
These benefits are due to the exclusive use of high yield Credit Default Swap (CDS) indices in gaining exposure to high yield, rather than traditional high yield cash bonds.
How are you positioning your portfolio in uncertain times?
UBAM - Global High Yield Solution is able to adjust its positioning through its overall beta to the high yield market, its regional exposure between US and European credit risk and its interest rate exposure. The fund therefore has the required levers to shift its positioning efficiently due to the use of CDS indices, and in a timely manner due to the macroeconomic, top-down investment driven process.
The positioning of the fund in uncertain times reflects the nature of the market concern at the time. For example the recent environment would have seen investors fearing the impact of elevated inflation and higher interest rates, where amid this backdrop we were able to benefit from reducing the already low interest rate duration held within the fund even further.
With the growth outlook being the ultimate driver of credit spreads over the medium term, changes in our outlook for growth are also able to lead to changes in the fund's positioning. For example in times when we have seen downside risks to global growth, we have been able to reduce the fund's overall credit exposure to reflect this.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio?
We believe the macro-economic environment offers value for credit investors and in particular the high yield segment which screens attractive from a valuation perspective and leaves us having a positive credit bias. We anticipate moderating, but still solid global growth this year, in which a scenario of significantly higher default rates on the back of a recession is not our base case, despite this being increasingly priced in by markets. We view the US consumer as being in a strong position to deal with higher rates and inflation, supported by an extremely tight labour market and healthy consumer balance sheets.
The fund has also benefitted from the move higher in interest rates as the market repriced its Fed expectations significantly higher. The fund is naturally positioned with very little interest rate duration, and we decreased this further last year when it became clear that the Fed had lost its patience on inflation, which would result in a significantly hawkish shift in their communication. We think that the fund remains well positioned with low interest rate duration at a time of not only the Fed, but central banks globally turning increasingly hawkish and with uncertainty remaining high as to when these inflationary pressures will subside.
