The Barings European High Yield Bond Fund has this year the Rating FundsPeople for the consistency of its long-term risk-adjusted results. The Barings style of high yield platform focuses on analyzing a company’s ability to repay or refinance its debt instruments when they mature. That’s why they lend special attention to free cash flow generationtogether with competitive position of the company, the quality of management, the adequate capital structure and the associated legal documentation.
“We make investment decisions based on the expected long-term success of a company and we believe that the analysis of underlying credit fundamentals is paramount when it comes to mitigate the highly asymmetric return profile of high yield bonds”argue Chris Ellis and Craig Abouchar, both managing director of European High Yield at Barings.
Precisely One of the strengths of this fund is the size of the team, one of the largest in the sector, with more than 70 professionals dedicated to high yield in the US and Europe. “Thanks to our experience and investment resources on the ground in multiple regions, we are uniquely positioned to evaluate relative value opportunitiesespecially considering that Large and well-established companies in the market usually issue debt in several currencies”, defend Ellis and Abouchar.
Decisions based on an Investment Committee
It is thanks to their size that they can pose a strict entry requirement in the portfolio. Before inclusion, Each credit issuance is underwritten and thoroughly reviewed by the team of credit analysts, and each tranche of debt must be approved by the respective US or European Investment Committees.which are made up of the most experienced investment professionals in our sector.
“We believe that The fact of being directed by the Investment Committee contributes to producing this constant level of profitability, along with the size, depth and experience of our investment team, which spans the entire capital structure, both bonds and loans. This allows us to analyze all market operations, regardless of whether or not they are within a fund’s benchmark indexwith the level of detail necessary to identify the most attractive market opportunities,” explain the managers
The merits of each company
So, Barings high yield portfolios are built on the merits of each company included in a buy list approved by the Investment Committee, and not against a specific benchmark index. Given the asymmetric profitability profile, they place special emphasis on diversification, with between 100 and 150 companies. Positioning is both absolute (they consider that a market weight position is broadly in the range of 50 – 75 basis points) as asset (the 10 highest conviction holdings typically represent 10-15% of a portfolio and portfolios maintain a high active percentage, often with minimal exposure to large benchmark issuers).
And finally, it is worth noting that the team benefits from having specialized high yield traders who contribute to efficient execution and portfolio trading activity. “We have established long-standing relationships with major investment banks, which gives us access to the flow of new issues, as well as attractive trading opportunities in the secondary market and greater market liquidity”, explain the managers. In addition, Barings has also used technological improvements in trading, including peer-to-peer or portfolio trades, which can be an very efficient way to trade significant parts of the portfolio at the right time.
Update dthe Barings European High Yield Bond Fund
In the last 12 to 18 months, the management team has increased overall credit quality of high yield portfolios, reducing exposure to CCC-rated bonds, the category with the highest risk of default, given macroeconomic uncertainty and the impact of high interest rates. They have also tried to reduce exposure to cyclical and consumer discretionary sectors, favoring more defensive and inflation-resistant sectors. The fund also maintains an exposure null to the questioned real estate sector.
Looking ahead, they believe that the European high yield corporate market continues to offer a attractive total return potentialgiven that bond prices remain discounted in combination with the markets’ unprecedented low duration and maturity profile. “The market convention is to calculate spreads and yields to the worst.” However, companies with a high yield rating will proactively seek to refinance their debt at least 12 months before its final legal maturity due to auditor concerns, rating agency downgrades and working capital considerations,” the managers recall. .
That’s why see it likely that the real profitability profile of the bonds with final legal maturity in 2025 and 2026 will be significantly higher than the declared spread and profitability characteristics, taking into account the above. As the lower quality leveraged loan market successfully extended its maturity profile during 2023, it gives confidence that the higher quality European corporate bond market can do the same. So, this is an area of the market that they have been active in.
