Select International Bond Fund delivers three years of outstanding performance
THE SELECT International Bond Fund, managed and distributed by Select Managers Ireland Limited, part of the highly regarded pan-European financial advisory firm Blevins Franks, has produced outstanding performance over the past three years. Up to October 31, 2005, the fund produced an annualised return of 19.2 per cent compared to 15 per cent from its composite benchmark index and 5.2 per cent from the FTA British Government All Stocks Index.
Blevins Franks employs Aberdeen Asset Management’s specialist and experienced high yield bond team to provide day-to-day advice to the Dublin based Fund from the Group’s London offices.
Led by Paul Reed, the six-strong Aberdeen team employs a rigorous investment process incorporating both top-down and bottom-up views. Together with other members of the Global Fixed Income team, they formulate views on the direction of interest rates and other macroeconomic indicators to provide a basis for determining how defensive the portfolio should be. Based on their top-down views, the team select bonds using a bottom-up, in-house, research-intensive process.
Over 25 per cent of the portfolio is invested in investment grade quality bonds, with the remaining portfolio holding a diverse range of high yield bonds. It is intended that the former provides a counterweight to the higher risks associated with investing in high yield bonds.
Since November 2002, spreads (the risk premium of investing in high yield bonds rather than government bonds) have significantly tightened from around 13 per cent to around 3.5 per cent today. Improving fundamentals and increased appetite for high yielding securities have buoyed the market.
Going forward, the longer term prospects for the market are positive. The Fund is well diversified in terms of industry mix, with a very limited exposure to telecom related issues. The quality of companies within the Fund has also improved, largely due to the number of companies issuing bonds that have been downgraded from investment grade to high yield. Furthermore, investor concerns about structural subordination (credit seniority) have led to new issues providing increased protection to high yield investors should the issuing company get into difficulties.
Given that Europe is about the same size as the US, both in terms of the size of the economies as well as the populations, there is great potential for growth in European high yield. Currently, the vast majority of debt finance for companies in Europe comes from the bank debt market. What has driven so many companies in the US to tap into the high yield market is the increased flexibility issuing high yield bonds offer, both in terms of providing longer term financing and the ability to repay the loans early.
Over time, European companies will increasingly use the European high yield market to borrow in the same way. In addition to this, there is great potential for demand to increase from European investors. Pension funds and insurance companies in Europe are increasingly allocating a portion of their portfolios to the sector. In the US, it is much more common than in Europe for individuals to hold high yield corporate bond funds. These are key drivers for strong long term demand for this asset class both from companies looking to borrow and investors looking for a good source of income.
Paul Reed, Manager of Select International Bond Fund, comments: “Our style of rigorous bottom-up company research combined with a top-down overview has enabled us to provide strong returns to investors in the Select International Bond Fund. Over the next 12 months, we do not expect the same degree of market volatility seen in recent years. High yield spreads are likely to range three to four per cent above government bonds and we will take opportunities to top-up on weakness and top-slice on strength. Next year is likely to see intense corporate activity and interesting investment opportunities as a lot of new issues come to the market and companies look to refinance existing debt. However, the market is not without its risks of a repricing. Movements in short and long term rates may impact fixed income securities across the board but we believe that high yield will outperform other classes. There also remains the risk that too many companies will use this window of opportunity to access cheap funding which may result in a stock overhang or indeed result in credit deterioration. We are mindful of the above technical situation and believe that our high yield stock selection combined with the 25 per cent mainly sterling investment grade content offers investors a well-balanced portfolio with a high yield.”
• For further information, contact Bill Blevins, Managing Director of the Blevins Franks Group: [email protected]
