US Core High Yield strategy - Update 31.03.2020
Our overweight to short duration has helped our US core high yield strategy to outperform the market
PERFORMANCE UPDATE
- The US high yield market experienced some relief last week as the market rallied +7.81% from Monday’s close to Friday’s close. That said, the market is still down significantly M-T-D and Y-T-D, with spreads widening by 542 bps to 902 bps Y-T-D as of the March 27th.
- The Y-T-D sell-off was initially driven by growing concerns over the spread of the coronavirus and its impact on the global economy, and has been exacerbated by a dramatic drop in oil prices after Saudi Arabia threatened to cut prices and increase production.
- Our portfolios were defensively positioned as we entered this volatile market, thereby providing significant downside protection.
- Our overweight to short duration has helped our US core high yield strategy to outperform the market by ~331 bps (USD, gross of fees) during this volatile M-T-D period.
- The Energy sector has clearly been impacted the most over this period, and we have been defensively positioned in this sector which has helped relative performance. Specifically, we are underweight the Exploration & Production and Oilfield Services sectors which have been hit the hardest, and our up-in-quality bias has helped us to avoid many of the most distressed credits in this space.
STRATEGY CHANGES
- Our strategy for US Core High Yield has begun to pivot from our short duration overweight, and into securities with a higher total return potential over the medium term. There is no set time frame for this transition, other than our ability to find securities that we think are appropriately priced for the current economic conditions.
- We executed several purchases of higher quality, longer duration securities as well as higher yielding securities before and during the market rally. While this helped our market capture in the rally, the strategy still underperformed last week.
- While we will continue to look to add higher yielding and longer duration securities, we do not feel compelled to chase certain investments after last week’s rally. We believe continued headlines regarding the longevity of the coronavirus and the large amount of expected supply coming from Investment Grade downgrades should result in continued volatility and increased opportunities in the coming weeks.
- From a credit analysis perspective, our primary focus right now is investing in companies with adequate liquidity in a stressed economic scenario.
- Our portfolios remain very well diversified.
CURRENT THOUGHTS & OUTLOOK
- We are monitoring the current situation very closely, with special attention to specific sectors and companies that are the most impacted, such as energy, leisure, transportation, etc.
- We are finding attractive opportunities in companies that are impacted by the current economic environment but have robust liquidity to manage through the remainder of 2020.
- Those credits that sold primarily due to technical reasons and that are the least impacted by the economic slowdown, offer less total return potential than they did the prior week.
FLOW & LIQUIDITY
- Liquidity has been challenging but manageable and we have been able to trade our US high yield portfolios throughout this period. Liquidity remains strained (i.e., bid-ask spreads have widened) in the more distressed parts of the market such as energy.
- Our dedicated team of four US high yield traders have experienced periods of lower liquidity and stressed market conditions and have been able to find liquidity and ensure best execution in those periods. While we cannot predict short term liquidity conditions in the light of recent extreme volatility, we also believe that our funds are well diversified and positioned, should a significant liquidity need arise.
- We are maintaining our cash near the upper end of our targeted 0-5% cash allocation range, should we need to meet redemptions. Some funds have seen recent inflows, pushing cash levels higher than our targeted range. To date, outflows have been minimal.
disclaimer Please note that the performance data is not intended to represent actual past or simulated past performance of AXA IM’s US Core High Yield strategy. The data is based on a representative account that follows AXA IM’s US Core High Yield strategy. (1) Representative Account has been selected based on objective, non-performance based criteria, including, but not limited to the size and the overall duration of the management of the account, the type of investment strategies and the asset selection procedures in place. Therefore, the results portrayed relate only to such accounts and are not indicative of the future performance of such accounts or other accounts, strategies and/or services described herein. In addition, these results may be similar to the applicable GIPS composite results, but they are not identical and are not being presented as such. Account performance will vary based upon the inception date of the account, restrictions on the account, along with other factors, and may not equal the performance of the representative accounts presented herein. The performance results for representative accounts are gross of all fees and do reflect the reinvestment of dividends or other earnings. No assurance can be given that the US Core High Yield strategy will be successful. Investors can lose some or all of their capital invested. The US Core High Yield strategy is subject to risks including high yield debt securities, investments in specific countries or geographical zones, convertible securities, sovereign debt, 144A securities, contingent convertible bonds. Not for Retail distribution: This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly. Past performance is not a guide to current or future performance, and any performance or return data displayed does not take into account commissions and costs incurred when issuing or redeeming units. The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. Exchange-rate fluctuations may also affect the value of their investment. Due to this and the initial charge that is usually made, an investment is not usually suitable as a short term holding. This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. The strategies discussed in this document may not be available in your jurisdiction. Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision. AXA INVESTMENT MANAGERS PARIS, a company incorporated under the laws of France, having its registered office located at Tour Majunga – La Défense 9 – 6, place de la Pyramide – 92800 Puteaux, registered with the Nanterre Trade and Companies Register under number 353 534 506, a Portfolio Management Company, holder of AMF approval no. GP 92-08, issued on 7 April 1992.