Mark Benbow gives an overview of the Aegon High Yield Bond strategy and the outlook for the high yield market
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 160 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 currently positioning your portfolio?
The outlook for high yield remains cautiously optimistic. There are pockets of value to be found and we really like higher rated risk. In addition, higher coupon rates provide attractive opportunities to increase income.
With the attractiveness of higher quality credit now, moving up in credit quality allows investors to be well paid as well as reduce refinancing risk which is an ever-growing concern in our market. As a result, we are maintaining our focus on higher-quality companies and lower exposure to CCCs and below. This positioning adds some defensiveness to the portfolio while also enabling us to add yield in higher-quality companies.
Fundamentals are showing signs of deterioration with leverage ratios increasing and interest coverage rates declining. However, companies are coming off a very strong starting point, and the market is arguably higher quality than it has been previously. Importantly, companies are addressing upcoming maturities, supporting a muted defaults outlook. However, increasing dispersion across the high yield market, notably within CCCs and below, warrants a sharp focus on bottom-up selection. We expect to see more dislocation in the lower-quality segment with weaker companies facing more challenges. This provides ripe opportunity for active managers to deliver alpha and differentiated performance.
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.
A key investment theme in the fund is a focus on income opportunities. For income-oriented investors, now is the time to consider investing in fixed income. The higher rate environment, coupled with an increasing refinancing activity, has led to attractive coupon rates rarely seen in recent years.
Importantly, adding income does not require stretching for unnecessary risk in lower-quality credit. We are uncovering opportunities in BB or B-rated bonds that offer double-digit coupon rates, which can provide a sweet spot for investors from a risk/return perspective. Companies in this space can still afford to pay higher coupon rates, but are also better set up to weather a potential economic slowdown.
While income is always an important driver of returns in high yield, the higher rate environment has provided opportunities to substantially increase income. With spreads hovering around historically tight levels, it is unlikely that we will see meaningful capital appreciation from tightening spreads. As a result, we prefer to generate the majority of the return from income in this environment. This focus on higher-coupon bonds and shorter-dated securities can help reduce the volatility and add some defensiveness to the portfolio, while still pursuing competitive total returns.
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