ODDO BHF Global Credit Short Duration is managed in by Alexis Renault, global head of High Yield at ODDO BHF AM. The fund was launched on 22 October 2018 and in the first year it have a track record with solid performance (~2%) and low volatility (< 2% to be checked with reporting). The fund will invest predominantly in high-yield bonds with a rating of at least B3 or B- but can increase the portion of investment-grade securities to up to 100% depending on the credit cycle.
Interview with Alexis Renault, Head of High Yield at ODDO BHF AM
What is the major contribution to performance? Security selection, debt rating allocation?
Choosing the right loans and avoiding defaults is at the heart of our business and is the true source of long-term performance generation. This fundamental analysis is also at the heart of our investment process for the ODDO BHF Global Credit Short Duration strategy. The High Yield market has performed exceptionally well over the past 10 years (+100%), with the market benefiting from tighter spreads and significantly lower rates. Now, the major element of recent years remains the effect of central banks on the credit market. This effect has been significant since 2016 through the Investment Grade bond asset purchase programme, which has had a major impact on the level of spreads on both Investment Grade and High Yield bonds.
Do you expect to modify the allocation to high yield (74%) in the coming months?
The high-yield corporate bond market today offers an average yield to maturity of 3.6%. The return offered by the market is attractive, taking into account the market’s 1-year default prospects and the very low level of market volatility. I am currently noting the interesting level of returns offered in category B compared to BB. Indeed, some bonds with a B rating offer very high yields (7%+) compared to their respective credit qualities. So there are still great opportunities.
In which countries and sectors do you find the best high yield corporate debt? And high yield Gobis? Do you hedge your currency exposure? If yes, how?
Which region will be the focus in 2020? To date, we are comfortable with the portfolio’s positioning of 34% in the Americas, 46% in EMEA and 20% in Asia. Indeed, the neutral distribution is 1/3 in each of these three regions. Afterwards, the distribution can vary between 20% and 50% on each zone. We tactically prefer to overweight the European zone, which offers a risk-adjusted return that we believe is more balanced than the Asian zone. In fact, the ODDO BHF Global Credit Short Duration fund is a “pure” fund with a short duration. We invest in bonds with a remaining final maturity of no more than 5 years. Secondly, the fund has a real geographical diversification while many players have a bias on the American market (>50% on average). It should be noted that the fund is invested in hard currency only, i.e. in USD, EUR, GBP hedged against the euro.
Do you expect interest rates to remain low and debt issues in negative yield to grow? How do you deal with those low handicaps
The two main risks are a more pronounced economic slowdown than expected and a return of inflation. If inflation is higher than expected, this could lead to a significant increase in interest rates and could call into question the solvency of some borrowers. While inflation today remains modest, I think we must keep in mind that it can surprise on the rise!
The launch of the Global Credit Short Duration strategy took place in an uncertain market environment in which investors are looking for both positive carry and low volatility. In a negative return environment, our fund is able to offer positive returns and low sensitivity to certain risk factors, such as interest rates or credit. In addition, the global management approach is a real source of diversification. If the stabilization of the global economy is confirmed, we may need to increase interest rate sensitivity, credit risk and the cyclical portion of the portfolio.
