In search of value with U.S. credit bonds: Oyster US Core Plus Fund

This past June iM Global Partner announced the launch of the Oyster US Core Plus (LU0970691233), a fund whose objective is to search for value in U.S. credit bonds and to offer a balance between risk and return through investment in quality credit issuers trading at wide spreads. The launch of the fund comes at a time of high demand for USD denominated debt.

In this interview with Roger McEniry and Daniel D. Dolan, respectively managing partner and founder at Dolan McEniry, a strategic partner of iM Global Partner and manager of the Oyster US Core Plus fund, we hear about the added value of USD corporate debt within a portfolio, especially for European investors in our current environment of high volatility.

What is the investment objective of the Oyster US Core Plus fund?

Dolan McEniry’s strategy strives to provide excess returns through the identification of undervalued corporate bonds using free cash flow credit analysis. The objective of this Sub-fund is to provide its investors with an appreciation of their investment mainly through a portfolio consisting of bonds of U.S. or other issuers and denominated in USD. At least two thirds of the Sub-fund’s assets, after deduction of cash, are invested at all times in bonds denominated in USD.

The Oyster US Core Plus fund invests in US corporate debt with a 75% weight in investment grade bonds and the remaining 25% in high yield. Why is IG an investment opportunity right now?

Investment safety and risk mitigation are of primary concern to many investors in volatile markets such as these. Dolan McEniry’s core competence is credit analysis, and they focus on a company’s ability to generate generous amounts of free cash flow over time in relation to its indebtedness. This allows them to invest in quality, investment grade and high yield issuers at what they believe to be attractive valuations. Based on these valuations, the allocation to high yield may fluctuate up to 25% in high yield. However, the strategy will be approximately 75% investment grade corporate bonds and a maximum of 25% high yield corporate bonds. Despite all the uncertainty surrounding COVID-19, they believe that the sub-fund is positioned to provide reasonable absolute and relative returns going forward.

With the volatility seen in recent months, what investment opportunities have you found? Could you give us any concrete examples?

Their outperformance during the second quarter was driven by their allocation and performance in corporate investment grade and corporate high yield which significantly outperformed U.S. Treasury securities and government related sectors during the “risk on” rally.

What are the top three positions you currently have in your portfolio?

In the future Dolan may show the top 3 holdings as of March 31, 2020 or April 30, 2020, at least a 60 day lag. However, Oyster US Core Plus fund did not have any holdings as of these dates as Dolan McEniry had not commenced management.

Do you take into account ESG criteria when selecting securities?

The manager does not incorporate ESG principles into the management of the sub-fund. This data is as of 6/30/20 and not relevant to Dolan holdings in the sub-fund.

What challenges do you have at Dolan McEniry for the second half of 2020?

Despite the strong rally in corporate bonds in the second quarter, the uncertainty and volatility seen since the first quarter of the year will likely continue until there is a clearer picture for the overall economy. Dolan McEniry will continue to monitor markets for risks and opportunities and will adjust as appropriate to add value. Spreads of both investment grade and high yield bonds tightened significantly during the quarter but remain at levels well wide of historical averages.

What does the launch of this fund bring to European investors?

During the recent months as market volatility has increased, opportunities have arisen for bond managers to invest at wider credit spreads. The size and depth of the U.S. corporate bond market being nearly 3 times bigger than the Euro corporate bond market, European investors can therefore access via the OYSTER US Core Plus fund strong active management opportunities while the hedging currency costs are the lowest in the last 8 years.