Market clouds part to shine light on high yield opportunity

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Disrupted markets and high volatility levels have stabilised enough to create selective investment opportunities across a range of high yield bonds in the opinion of Insight Investment¹ (part of BNY Mellon Investment Management) high yield portfolio manager Ulrich Gerhard.

After a torrid first quarter of 2020, and despite ongoing bouts of volatility, Insight portfolio manager Ulrich Gerhard believes markets are now stabilising, with the corporate bond market once again opening up for issuance from strong companies. Central bank intervention, such as that from the US Federal Reserve (Fed) and Bank of England, is helping to ease financial stress on companies, particularly smaller ones, which in turn is also bolstering the corporate debt market, Gerhard notes.

Despite the tough trading conditions markets have gone through, Gerhard sees considerable investment opportunity, with many so-called fallen angels likely to provide potentially attractive buying opportunities.

Markets have stabilised after the Fed decided to support fallen angels and also indicated a desire to buy high yield ETF’s. Furthermore the European Central Bank will allow banks to use fallen angels as collateral in its Long-term Refinancing Operation,” he adds.

Gerhard sees specific potential in high yield companies involved in areas such as lab testing and satellite radio and cable – with home working providing a boost to such sectors. He also points out that telecommunications and media, packaging and food can be stable and solid cash flow generators even during economic slowdowns.

While certain sectors are offering buying opportunities, Gerhard adds others are clearly stressed or appear un-investable at this time. For him, such areas include aerospace, airlines, energy, entertainment, retail, publishing and transportation. Spread levels in such sectors remain over +1000 basis points (as at end of April), he adds.

Select opportunities

While energy stocks make up a large portion of some high yield markets, such as the US, it isn’t a homogenous sector. Within his own short-dated high yield strategy Gerhard says he is comfortable with his energy holdings.

The weighting to the energy sector was reduced from 13% (as of Feb 29th) to 9.6% by the end of April, namely (in reaction to the energy-related credit sell-off and as of 30 April it was at 10% as we added an investment grade rated refining company at very attractive levels. Gerhard points out the vast majority of his weighting is focused on upstream operations split between oil and gas production, refining and pipelines) Gerhard also believes short-dated high yield issues can offer much less volatility than the broader high yield market and as such sees plenty of opportunities to deploy the cash position his team amassed amid the volatile March period.

We remain extremely cautious, but opportunistic, as we continue to work through the effects of the global shutdown. We are actively engaging with the management teams of all the companies we invest in and have found these discussions reassuring. Our main purchases have been non-cyclical companies that have sold off with the market, despite having robust business profiles and cash flows. We are finding some very attractive opportunities for the fund.

New issue markets have reopened for some credits for names with proven business models. Companies are also in a much better position today re their cash burn per month, allowing investors to make a better assessment with regards to how many months a company can stay alive during a total shutdown. In this respect, cash and newly raised cash are vitally important. This has also provided investors with more confidence to invest at more attractive levels, though credit spreads remain elevated for the foreseeable future,” he concludes.

Sector allocations

Industry Split

Industry Ticker
Industry
Total
%
Telecom
Telecom
112,498
16.06%
Services
Services
49,174
7.02%
Chemicals
Chemicals
43,967
6.28%
Industry
Industry
32,382
4.62%
Food
Food
36,702
5.24%
Pharma
Pharma
32,780
4.68%
Oil & Gas
Oil & Gas
29,722
4.24%
Health
Healthcare
31,402
4.48%
Cable
Cable
35,224
5.03%
Mining
Mining
21,045
3.00%
Financial
Financial
9,878
1.41%
Refining
Refining
27,028
3.86%
Metals
Metals
13,799
1.97%
Packaging
Packaging
23,007
3.28%
Retail
Retail
24,622
3.51%
Aero
Aerospace
0
0.00%
Oil & Gas Service
Oil & Gas Service
11,783
1.68%
Tech
Tech
16,277
2.32%
Leisure
Leisure
11,578
1.65%
Property
Property
10,977
1.57%
Build
Building
10,081
1.44%
Transport
Transport
8,261
1.18%
Utilities
Utilities
12,001
1.71%
Auto
Automotive
0
0.00%
Retail pubs
Pubs
5,303
0.82%
Media
Media
5,751
0.82%
Pipe
Pipeline
4,718
0.67%

Sector allocations at 01.05.2020. Source: Insight Investment

¹Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.

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Emerging Markets Risk: Emerging Markets have additional risks due to less-developed market practices.

Important information

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This is a financial promotion and is not investment advice. For a full list of risks applicable to this fund, please refer to the Prospectus or other offering documents. Before subscribing, investors should read the most recent Prospectus and KIID for each fund in which they want to invest. Go to www.bnymellonim.com. The Prospectus and KIID are available in English and in an official language of the jurisdictions in which the Fund is registered for public sale. Any views and opinions are those of the investment manager, unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes. The Fund is a sub-fund of BNY Mellon Global Funds, plc, an open-ended investment company with variable capital (ICVC), with segregated liability between sub-funds. Incorporated with limited liability under the laws of Ireland and authorised by the Central Bank of Ireland as a UCITS Fund. The Management Company is BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML), regulated by the Commission de Surveillance du Secteur Financier (CSSF). Registered address: 2-4 Rue Eugène Ruppert L-2453 Luxembourg. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and its subsidiaries. In Austria, the current Prospectus and the Key Investor Information Document are available free of charge from Raiffeisen Zentralbank Österreich Aktiengesellschaft, Am Stadtpark 9, A-1030 Vienna. In Belgium, the KIID, Prospectus, articles of association and latest annual report are freely available upon request to from the paying agent: JP Morgan Chase Bank, 1 Boulevard du Roi Albert II, B-1210 Bruxelles, Belgium. The Prospectus, KIIDs, articles of association, annual and half-yearly financial reports are available in English. In Germany, the prospectus is available from BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML), German branch, MesseTurm Friedrich-Ebert-Anlage 49, 60308 Frankfurt am Main, Germany. In Spain, BNY Mellon Global Funds is registered with the CNMV, Registration No. 267. In Switzerland, the Company is established as an open-ended umbrella type investment company under Irish law and the Sub-funds are authorised by FINMA for distribution to non-qualified investors in or from Switzerland. The Swiss representative is Carnegie Fund Services S.A., 11, rue du Général-Dufour, 1204 Geneva. The Swiss paying agent is Banque Cantonale de Genève, 17, quai de l’Ile, 1204 Geneva. Investors in Switzerland can obtain the documents of the Company, such as the Prospectus, the KIIDs, the Memorandum and Articles of Association, the semi-annual and annual reports, each in their latest version as approved by FINMA, in German, and further information free of charge from the Swiss representative. Issued in Switzerland by BNY Mellon Investments Switzerland GmbH, Talacker 29, CH-8001 Zürich, Switzerland. Authorised and regulated by the FINMA. Issued in UK by BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority. Issued in Europe (ex-Switzerland) by BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML), a public limited company (société anonyme) incorporated and existing under Luxembourg law under registration number B28166 and having its registered address at 2-4 Rue Eugène Ruppert L-2453 Luxembourg. BNY MFML is regulated by the Commission de Surveillance du Secteur Financier (CSSF).

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