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Credit star Smouha: high yield no longer living up to its name

Credit star Smouha: high yield no longer living up to its name

High yield bonds are failing to live up to their name and investors would be better off looking at opportunities in bank debt, Citywire A-rated manager Anthony Smouha has said.

Smouha made the comments in his latest update for the GAM Star Credit Opportunities fund.

In the update, the credit specialist said there were several niche alternatives he was seeking to tap as he moved away from the high yield bond market.

‘Bond investors have realised that high-yield bonds no longer provide what their name suggests, but all is not lost. There are specialist areas that still offer interesting potential returns,’ he said.

‘One such niche is the lower-rated debt of high-quality investment grade companies. Investors can gain exposure to strong companies with robust balance sheets and leading market positions through bonds offering higher coupons and potential for capital appreciation.’

An area of particular interest, Smouha said, is the junior bank debt market, which has begun to receive more positive sentiment among investors following a period of prolonged uncertainty.

‘Despite some significant recovery, we believe bond issues remain mispriced following the financial crisis and many financials are more robust than consensus would suggest.’

‘Regulatory pressure also introduces a dynamic that they must continually strive to be more safe and solid. Other interesting areas in the investable universe include brokers, insurance and re-insurance companies, asset managers and advisory firms.’

Floating rate notes

Floating rate notes from financial issuers are a firm fixture of Smouha’s fund, with Barclays, Lloyds TSB Bank and Scottish Mutual Assurance featuring prominently.

Recent activity has seen Smouha add older subordinated debt, such as Nationwide, which can offer yields of over 6% and sometimes 7%.

In the data to the end of February 2014, Smouha said fixed-to-floating rate notes now account for 41.7% of the fund’s overall exposure, which reflects a wider view that rates will rise across global economies in the near-to-mid-term.

The GAM Star Credit Opportunities (USD) USD Acc has returned 14.5% over the 12 months to the end of March 2014. Its Citywire benchmark, the BofA Merrill Lynch US High Yield BB-B Rated TR, rose 6.92% over the same period.

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