Moving deeper into high-yield bonds
Sandy Liang has been positioning the Aston Hill Strategic Yield Fund for rising interest rates over the past year, which is reflected in the fund’s current weighting of more than 80% in high-yield bonds.
“When rates go up, it’s not a bad thing for high-yield debt because of where we are in the business cycle,” said the Aston Hill Financial portfolio manager, noting the fund has an underlying yield in the mid-7% range and a duration of just three years. “If rates are going up for the right reason, which they are, then there will be credit improvement in the underlying holdings.”
The firm recently did a study looking at instances when 10-year treasury yields rose 100 basis points or more and found there have been 13 such cases in the past 30 years, and high-yield outperformed investment-grade debt 12 times.
Liang also compared the performance of high yield to loans in nine of those cases, and found the former asset class did better in six of them.
“I made a decision not to be in interest-sensitive paper,” he said, adding that 2013 panned out exactly as it should have. “Investors lost money in long-term treasuries, lost money on investment-grade bonds, and made a few percent in high yield.”
There is certainly no shortage of product in the US$1.5trillion U.S. high-yield market and US$1-trillion U.S. loan market.
Specifically, he pointed to having positions in Air Can
ada, an asphalt distributor, oil and gas producers, autopart manufacturers and real estate investment trusts, while avoiding areas such as forest products.
“It’s all about getting return on capital as a lender,” the manager said, highlighting his focus on asset value protection. “It’s not always about what the company is going to do this quarter or next year, but rather it’s about getting your money back.”