1. 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 fund 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 dynamically adjust allocations to regions, ratings, sectors and companies.
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 maximise 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.
2. 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.
The current environment presents numerous high yield opportunities. As rates have shifted higher, many high yield bonds offer attractive yields, even for higher-quality companies. We like the risk-reward offered by high coupon bonds which help enhance the fund’s income. We have been adding exposure to well-capitalized companies with longer-dated bonds that have lower call risk, allowing us to lock in higher coupons for longer. By sector, we continue to like certain banks and aircraft lessors, as well as certain consumer-oriented sectors, such as leisure.
Given macro uncertainties, we have been pursuing an up-in-quality strategy. We view a soft-landing scenario as a low probability and expect developed-market economies to contract modestly in 2024. As a result, we have been allocating to higher-quality companies with well-managed balance sheets and an attractive risk-reward profile. We are also focused on selecting more defensive bonds in the capital structure that can provide more downside protection.
In addition to investing in our best ideas, we are focused on mitigating downside risk by avoiding companies with low margins, high operational leverage and high financial leverage. As the economy slows, we expect to see increasing divergence across the high yield market. More than ever, we think index agnostic security selection will be key to delivering performance in the high yield market.
3. Looking ahead to 2024 and beyond, where are the biggest opportunities and risks for your strategy?
Looking ahead to 2024, we believe the high yield market will provide compelling opportunities based on the solid fundamental starting point and attractive yields. However, caution is warranted as macro headwinds persist.
From a company perspective, many issuers have maintained solid fundamentals despite elevated inflation. Although companies continue to face fundamental pressures, most high yield issuers have well-managed balance sheets and are well-positioned to navigate a downturn. That said, dispersion is increasing as the weaker companies have little room for error. In this environment, security selection is critical. As result, we continue to focus on bottom-up research and are moving up in quality to hedge against an economic slowdown.
From a valuations perspective, we continue to like high yield bonds at yields above 8%. Although each cycle is different, historically the starting yield to worst has been a reasonable estimate of forward five-year returns. With the current index yield to worst of 8.6%**, we think high yield bonds look attractive for long-term investors, provided they can withstand some short-term volatility. Additionally, the structural case for high yield remains in-tact with equity-like returns and lower volatility over longer periods.
Given the macro uncertainty, we suspect volatility will remain elevated in 2024. While credit spreads may be biased toward widening in the short-term, we think underlying yields will compensate for widening in spreads. Additionally, market dislocations should expose intriguing buying opportunities and attractive entry points. By balancing caution and optimism, active managers can uncover intriguing opportunities in the year ahead.
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Thomas Hanson is the Head or Europe High Yield at Aegon Asset Management
