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?
The Aegon High Yield Bond strategy is managed using an active, high-conviction style to invest across the global high yield market. The strategy aims to maximise total return while also generating strong risk-adjusted returns.
Our approach is focused on bottom-up security selection. We rely on deep, fundamental credit analysis to build a high-conviction portfolio of best ideas from the bottom up. Supported by a structured top-down process, we embrace a dynamic approach to allocating to regions, ratings and sectors.
The mandate is flexible and not constrained by an index. We invest only where we see value. We believe that this flexible approach helps us to maximize the opportunity set and avoids unintended constraints imposed by a benchmark as we aim to outperform our peers and global high yield indices.
Maintaining investment discipline is central to our style. Using a risk-focused mindset, we take sufficient, but not excessive, investment risk as we pursue performance targets while staying within risk tolerances. The team seeks multiple alpha sources so that no individual investment risk dominates the risk/reward profile.
The strategy is team managed, bringing together individuals with diverse perspectives and complementary skillsets. Thomas Hanson, Head of Europe High Yield, and Mark Benbow, Investment Manager, co-manage this strategy. They are supported by a global platform of over 140 investment professionals*, including dedicated high yield credit research analysts as well as distressed analysts. Together, the teams aim to exploit market opportunities and inefficiencies as they pursue competitive returns.
How are you positioning your portfolio for 2023?
After years of low rates, high yield is now living up to its name. With yields above 8% on the ICE BofA Global High Yield Index as of 15 March 2022, high yield currently provides attractive opportunities to generate income and above-average long-term total potential. Additionally, most high yield companies entered 2023 with relatively healthy balance sheets and a muted defaults outlook. However, the macro outlook is challenged amid aggressive monetary tightening and slowing economic conditions.
In the short term, the elevated starting yield of the asset class still provides attractive positive total return potential. However, downside risks remain. Additionally, it is unlikely that we see sustained spread tightening in the near term. That said, over the long term, global high yield has delivered competitive risk-adjusted returns versus many other fixed income assets, and even equities.
Given the challenging economic outlook, we are pursuing an up-in-quality approach. We have been adding exposure in higher quality BB rated bonds, as well as increasing selective investment grade exposure. From a regional perspective we think European high yield still offers clear relative value versus US high yield. We remain underweight emerging markets given heightened volatility and elevated downside risks. Overall, we remain focused on bottom-up credit selection as idiosyncratic factors continue to create bifurcation across the market.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
In terms of sector positioning, we believe the consumer is stronger and more resilient than the market believes. Macro tailwinds, such as low unemployment, are keeping wages high, which is beneficial for the consumer. Savings rates have fallen but we think there is still significant pent-up demand. We own pure retail names and gaming names which are exposed to high growth online. The fund also includes some higher-end consumer service names, and we barbell this position with companies on the other end of the spectrum, such as a no-frills gym operation.
Conversely, we dislike businesses with high financial and operational leverage as they can very easily be carried out by the cycle. We are also avoiding companies driven by commodity prices which are out of management's control. Additionally, we have very limited exposure to automotive companies, as most have low margins, high operational leverage and high financial leverage, which can go wrong very quickly.
While the fund reflects certain sector themes, we think idiosyncratic factors will continue to create bifurcation across the market and drive the bulk of returns in high yield this year. As a result, we remain focused on bottom-up credit selection and high-conviction ideas.
Mark Benbow is an investment manager at Aegon Asset Management.
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