High Yield Debt
Dutch pension fund | July 2017
Engagement at a glance
A Dutch pension fund was entering US high yield debt, reducing its European HY exposure, and sought an appropriate pooled fund for a first EUR 15 million investment. They wished to avoid short-duration strategies and minimise off-benchmark exposure, with an emphasis on sector and security selection.
As a Dutch investor, the client needed a manager with ability to provide regulatory FTK reporting (look-through, ratings, cash flow and yearly cost transparency). They also needed a readily available UCITS fund and, while US HY bond manager may have long histories of running money in segregated accounts or in 40ACT funds, many do not offer UCITS vehicles.
- The client’s requirements for a UCITS vehicle, a deep understanding of Dutch regulatory requirements and no short-duration strategies narrowed the available opportunity set, making it critical to scour the universe for a strong group of appropriate offers – 27 in total.
- In-depth qualitative and quantitative analysis revealed eight that were better equipped to generate through-the-cycle outperformance, with a process driven by credit sector and security selection.
Our specialist says
The key to active management in high yield debt is avoiding defaults. Additionally, it is also important to capture not only opportunities for coupon income, but also price appreciation from spread compression upon improvement of a company’s creditworthiness. Managers need to be appropriately resourced for in-depth credit research and detailed understanding of the issuers they lend to, including how they may perform over the cycle.