Barings - Event Voice
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?
Our Global High Yield Bonds strategy aims to provide investors with the potential for high current income and attractive risk-adjusted returns by taking a credit-intensive approach to developed markets high yield bonds. At Barings, we make investment decisions based on the expected long-term success of a company, its ability to service its capital structure, and any mispricing perceived by the market on its securities, as well as other market inefficiencies. Through this time-tested process, we can construct portfolios of high conviction credits, which have the potential to perform in both up and down markets.
It is our belief that when investing in high yield bonds, there is no shortcut for in-depth credit work and that sufficient resources are necessary to identify mispriced securities or other attractive relative value opportunities. In a constantly developing investment landscape, having a large and experienced investment team investing across high yield capital structures is essential for generating compelling long-term performance through full market cycles. We have a well-resourced team of senior portfolio managers in both the U.S. and in the U.K. and a deep bench of over 30 credit analysts focused exclusively on sub-investment grade companies.
How are you positioning your portfolio?
Our overall portfolio composition is really the result of security selection rather than building a portfolio relative to a given benchmark, and we emphasise the importance of constructing a well-diversified portfolio of high-conviction and well-researched positions. We do, of course, closely monitor the state of the broader economy and the impact that elevated interest rates and slowing economic growth may have on issuers.
Over the last year or so, the overall credit quality of the portfolio has increased. We have reduced our exposure to lower quality issuers in favour of more BB credits and crossover candidates. We have an overweight to single B issuers—this segment of the market has outperformed so far this year as credit markets performed better than many anticipated coming into 2023. In our view, single B credits provide a rich opportunity set for our analysts to identify idiosyncratic opportunities.
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.
We think the overall high yield market provides for an incredibly attractive opportunity in this current environment. For instance, yields have risen to the 8-10% range, bond prices are significantly discounted, and the historically low duration profile is under 3.5 years[1]. The asset class is also well-positioned for long term investors. While defaults have indeed risen, the strength of corporate balance sheets and a well-managed maturity profile all point toward outcomes more benign than many anticipated only a year ago.
Strong returns in high yield are often more about what you avoid given the asymmetry of the asset class. With that said, outside of specific areas like leisure, where companies continue to report strong demand recovery, and energy, a sector in which many companies are likely candidates to return to investment grade, we've generally been cautious on highly cyclical sectors like retail and autos. Real estate is another area where we have minimal exposure.
Nothing in this communication is intended to be taken as investment advice or a recommendation. The value of any investments and any income generated may go down as well as up and is not guaranteed.
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[1] ICE BofA Non-Financial Developed Markets High Yield Constrained Index as at 31 Aug 2023
