Bangkok--10 Oct--Aberdeen
Aberdeen Asset Management Company Limited (‘Aberdeen’) has launched a new fund investing in European high yield bonds, the Aberdeen Euro High Yield Bond Fund (ABEHB).
It will invest into an existing fund, the Aberdeen Global-Select Euro High Yield Bond Fund (Master Fund), listed in Luxembourg , which Aberdeen’s 12-man expert team has run for the past several years from London.
The fund aims to provide an attractive total return over the long term.
The fund is well spread, consisting of around 120 Euro high yield bonds (ie, bonds issued in Euros by companies in the Europe including the UK). It offers a significant pick-up in yield, currently 6.45% versus benchmark government bonds, and much more than its benchmark’s 3.97%. (As at end September 2014)
This pick-up is achieved through allocating around two-thirds of the portfolio to single ‘B’ rated bonds. Aberdeen sees better pricing in these credits as these may be less well researched than higher rated bonds and less exposed to any adverse movement in government bonds. But it emphasises the importance of thorough credit due diligence first.
The market for Euro high yield bonds has been growing fast as re-capitalising banks withdraw from lending and borrowers turn to public debt markets instead. By August new issuance had topped US$115bn for the year. On the demand side, net inflows into the market amounted to US$9.3bn in the year until August. The more established US dollar high yield market, by contrast, has seen redemptions.
The preference for Euro high yield bonds may reflect historically low levels of default of just 1.4%. Furthermore, with Europe’s inflation rate declining to just 0.4%, and many of its economies in danger of slipping into recession again, there is little immediate danger from rising interest rates and higher debt servicing costs.
Risks are of an exodus of hot money and limited capital upside (yields are at historic lows although spreads aren’t yet). Aberdeen adds that credit terms have been deteriorating in a borrower’s market, and it has walked away from many deals, especially those driven by leveraged buy-outs.
ABEHB is the latest in Aberdeen’s FIF range and will bring the number of such funds to ten.
David Lloyd-Nolan, Fixed Income Investment Specialist, Aberdeen Asset Management, comments:
“Accommodative ECB policy is supporting Euro High yield bonds. Sovereign QE would boost the asset class further. Corporate default rates remain extremely low and are expected to remain anchored for at least another couple of years. This is because there is relatively little debt maturing in the high yield market in the next three years and the ability to fund interest payments is extremely high. The latter point is further backed by falling yields which means companies are able to reduce their interest costs by refinancing existing debt at lower rates.”
Pongtharin Sapayanon, Head of Fixed Income – Thailand, Aberdeen Asset Management, adds:
“There is an opportunity for domestic investors to diversify portfolios by making an allocation to European high yield bonds as underlying yields are attractive and the structural story remains solid. For a similar price the asset class also offers higher quality and lower duration in comparison to its US equivalent.”
The IPO of Aberdeen Euro High Yield Bond Fund (ABEHB)* is from October 6-20th, 2014. The initial minimum subscription amount is 510,000 baht. For every 500,000 baht invested in ABEHB during this period investors will get 1,000 baht-worth of units free in the Aberdeen Cash Creation fund. ABEHB will invest mainly in units of a foreign fund, Aberdeen Global-Select Euro High Yield Bond Fund (Master Fund), which shall make up at least 80% of its NAV in any accounting period. The fund’s policy is to hedge most but not all of the underlying Euro-Thai baht currency risk. The Fund risk is level 5.