Stand: 31.01.2024
FUND COMMENTARY The Fund generated a negative return, net of fees, in October. The European high yield market declined due to rising interest rates and the increasing risk of default. The technology, restaurant and other financial sectors fell most significantly. The asset class saw issuance of just 1.7bn in October. The last two years have featured the lowest levels of issuance on record. The US high yield market posted its steepest losses in 12 months due to rising rates, increased geopolitical tensions and retail investor outflows. The Funds return was negative over the month, though its year-to-date performance remained well ahead of our target. The Fund continued to benefit from robust and rigorous stock selection and allocations to the European market. Our focus remains on free cash flow. The Fund has a running yield of +10% and short duration positioning, which makes it less sensitive to changes in interest rates and helps protect it from widening spreads. The months positive contributions came from bonds issued by companies operating in the energy and media sectors. Conversely, separate positions in the energy, fitness, and metal packaging industries detracted from performance. We experienced two calls in October. Our investment activity was restrained during the month. The average credit rating of the Fund stands at B+. The Fund has an average duration of two years. Top sector constituents include the telecommunications, chemicals and automotive industries. We believe the Fund is well positioned to withstand recessions or stagflation in the US and Europe. OUTLOOK Currently, we do not observe signs of stress in the high yield market, which is underpinned by strong interest coverage, low levels of leverage and competing sources of financing. We expect further opportunities to arise, as companies with free cash flow are set to refinance. We also anticipate robust issuance over the next two quarters. Net new issuance will likely remain tight, however, as the market is shrinking due to the emergence of private credit and collateralised loan obligations. We dont believe the modest economic slowdown will result in excessive defaults. While inflation is moderating and the peak in the monetary tightening cycle seems near, restoring normal levels of inflation, in our view, will be far from smooth and will require interest rates to remain higher for longer. We therefore anticipate spreads to remain within current ranges and believe overall yield potential to be attractive. The Funds short duration position aims to protect capital during periods of market volatility.