Bangkok--11 Mar--Aberdeen Asset Management
Sources of income have become even scarcer since the start of this year. Globally, there are now around $7 trillion of negative yielding government bonds. With ever lower policy rates banks are struggling to pay positive rates for deposits as their margins become ever squeezed. Dividend strategies are being revisited as we continue to see dividend cuts from a variety of companies across several sectors. This is structural and likely to persist for several years; so, "What do you do with a problem like income"? Well, we think an allocation to our fund makes an awful lot of sense.
European High Yield is an oft overlooked asset class. It has grown significantly since inception in the late 1990's, exponentially over the last five years and now comprises over 700 bond issues worth €360bn. Many household names make up the European High Yield market such as Tesco, Virgin Media, Thames Water, Debenhams, Jaguar Land Rover, Fiat, House of Fraser and Co-Op group. A large part of the market is made up of lesser known names, but nevertheless, these provide goods and services that touch many parts of our day to day lives.
So, what are the factors that make an investment so compelling?
- European High Yield has a proven and reliable track record as a generator of income.
- Unlike dividends, bond coupons are contractual obligations and cannot be cut.
- Even when a company does default, all is not lost; the average recovery is 30-40 pence in the pound.
- The high level of coupon income provides a cushion against capital volatility, helping deliver strong risk adjusted returns.
- For the long term investor, the high level of income together with Einstein's "eighth wonder of the world," compound interest, provide a powerful combination.
- European High Yield is relatively short dated, ie. it has a low sensitivity to interest rate risk. This means that if and when interest rates do eventually rise, it has the ability to substantially re-price without incurring significant capital losses.
- Unlike the US, European High Yield does not have large and distressed sectors in oil, gas, commodities or emerging markets.
- Defaults are the main risk for High Yield, but we believe they are set to remain quite low over the next few years. Europe remains far behind the credit cycle in the US and benefits from;
- Oil: The lower oil price is of significant benefit to European companies. Input costs are lower (benefiting margins) and demand for their goods and services is higher from consumers, who have increased disposable income.
- Currency: The weaker euro is also of great benefit, boosting the competitive position of European companies and making their goods and services more attractive to domestic consumers.
- Quantitative easing: We expect continued dovish action from the ECB, helping to underpin both the economy and default environment.
We are always mindful of the asymmetric risk inherent in High Yield Bonds but mitigate this through a healthy level of diversification; today we have exposure to around 125 different companies. Some facts about our fund;
- Yield to maturity (YTM): 7.14%
- Income yield: 6.6%.
- Effective duration: 2.8 years
Fundamental credit research is key to avoiding defaults. To this end we have a team of ten people, including an on-desk lawyer, all dedicated to the European high Yield asset class.
For additional fund information, investors may request the prospectus from Aberdeen, distributors or download from the website. Past performance/Performance comparison relating to a capital market product is not a guarantee of future results. Investment in a foreign investment fund (FIF) is subject to currency risk and may get a return lower than the amount initially invested. Please study product's features, conditions, and relevant risks before making decision to invest.
Investing in high yield bond fund involves high risk or complexity which will be different from investing in general fund. Despite the fact that the investors may have previous investment experience or previous transaction in capital market product , the investors should understand the risk and specific condition of this fund and should seek for additional advice from the distributors or the management company before making a decision to invest.