Speaker 0:
Tom Hanson is head of Europe High Yield at a asset management. He joins me now, Tom, looking at the high yield market in the real, what do you think are going to be the key theme shaping those markets over the rest of 2023?

Speaker 1:
Well, I think the outlook is quite delicately poised at this point in time. There's quite a lot of fear and nervousness out there. I think that's probably right. I think that's probably a fair reflection of people's concern over you know, the potential for a prolonged recessionary environment. Um,

Speaker 1:
so it's important to be cautious and cognizant of that. And certainly that's something we're doing in terms of our portfolio positioning. But equally, I think one of the greatest mistakes an investor can make is not embracing any opportunities that come alongside this uncertainty,

Speaker 1:
and certainly from our perspective in in high yields, um, despite being more cautious on the outlook, doesn't mean that the environment is bereft of opportunity for, you know, attractive ways that add performance to, um to the portfolio. But in broad

Speaker 0:
terms, what are some of those headwinds? What are some of those tailwinds?

Speaker 1:
I think the headwind is just risk sentiment towards the asset class. You know, when you talk about a recessionary environment, people tend to retreat into their shells a little bit, and high yield doesn't tend to be the top of many people's lists. Um,

Speaker 1:
but look within the fixed income spectrum, we are now beginning to offer some fantastic yields, and we do quite like the yield available in the high yield, uh, segment of the market. Perhaps the spread part, um, you know, could do with further improvement. But certainly, you know, there's a great opportunity here to add value,

Speaker 0:
and we're talking sort of middle to end of May 2023. You mentioned there some quite attractive spreads. I mean, in the round. What kind of yield can you get off a high yield

Speaker 1:
bond at the moment? So, broadly speaking, there's a yield of around 8.5 9% available across the market. You know, in our fund, we're yielding a little bit more than that up close to 10%.

Speaker 1:
Um, but the reality is when you look back, historically, you don't get that many opportunities to access this market on that kind of yield. um, you know, that's something that we've been, you know, not able to to sort of have in in recent years. And now that you do have it, you know, it's worth recalling that

Speaker 1:
Go back in time and look at when the market has yielded, you know, up above sort of 89%. And the subsequent forward returns that would have been delivered of that starting yield point have, um, have been very attractive

Speaker 0:
sticking with sector allocation for a moment. I had a look at the fund before we we did this interview, and you seem to be

Speaker 0:
quite a fan of parts of the consumer sector. Why is that particularly given the recessionary risk we were discussing earlier?

Speaker 1:
Well, look, we're not afraid of being contrarian in a lot of our calls. And indeed, that's part of what we do. Um, we have had over weights to some of those consumer facing spec, uh, sectors, leisure and retail being amongst them. Um, you can't always pick out what what that means, because underlying those sector exposures, you know, we've got businesses that we think are quite defensive. Um, but, you know, a key thesis for us is the consumer quite clearly isn't built equally

Speaker 1:
luxury. And and, you know, discounters, You know, they seem to do quite well. Um, in the middle, which gets squeezed. Well, that's not so much of the case. So it depends what you have in those consumer facing spec sectors. Um, but yes, certainly we have pushed that trade quite hard. But along with our up and quality thesis, we are rowing back on that a little bit right now as well.

Speaker 0:
You've mentioned a couple of times the importance of stock selection, idiosyncratic risk. So could you give us an example of something that you think is a good piece of stock selection within that consumer space? Yeah.

Speaker 1:
We like names like ASDA through the secure. That's one of our top positions in the fund. Um, within the gym space, we favoured things like David Lloyd on the luxury side and

Speaker 1:
then pure gym on the on the discount side again into those sorts of calls on the consumer not being equal that I've that I've said. So there's lots of things you can do. As we said, the consumer isn't built equal. You've got to pick your spots. But Yeah, we found some brilliantly performing businesses. Um, in those sectors that have allowed us to deliver a lot of

Speaker 0:
performance, you mentioned recessionary risks. A moment to go.

Speaker 0:
Uh, do you think a recession is coming and are yields big enough to compensate for those risks? Well,

Speaker 1:
I think when I think about this, it's more the spread you need within high yield that you need to compensate you for this recessionary risk. Uh, and certainly, I think, as I alluded to before, you know, the spread part of the market could potentially do with being a little bit wider to compensate for that uncertainty.

Speaker 1:
Um, you know what we saw, you know, towards the back end of last year, for example, was spreads perhaps more in line with pricing and recessionary risk. I think we've seen the market move away from that. Um,

Speaker 1:
particularly we saw a ferocious rally in January this year. It wasn't fundamentally based. It was entirely due to the technical part of the market. Now, clearly, you know, we've seen some developments in the banking sector that have heightened risk aversion here, but overall, yeah, we kind of think spreads ought to drift a little bit wider to reflect that recessionary probability.

Speaker 0:
Well, given the backdrop we've been discussing, how's the fund position right now?

Speaker 1:
Yeah. We're pursuing what we call an up in quality approach in the funds, um, so moving from lower rated to higher rated. So moving away from triple CS away from single bees into the double B part of the market, building our investment grades allocation within the fund, which we're able to do as part of our off market allocation from a sector perspective, moving from cyclical to non cyclical. So out of things like energy into things like telcos.

Speaker 1:
You know, the spreads and yields available in the telco part of the market for many years had been unattractive and uninteresting to us. Kind of seeing alongside that overall improved valuation picture some more, uh, attractive opportunities there. Particularly in view of that, perhaps more uncertain, opaque economic outlook. Um, and then I guess the final way would be within capital structures moving from unsecured to secured, um, thinking about managing your downside risk

Speaker 0:
and going to those lower rated parts of the market. You were You were talking about that? Such as the treble CS. Uh, do you fundamentally? Is your case that they're not pricing in recession risk? Um, what's where you are in treble CS? What? What are you focused on? Well, triple C

Speaker 1:
is obviously the, you know, the the most volatile part of our market. It's all about

Speaker 1:
syncretic risk in the trouble c part of the market. You could say that for high yield to a great extent, anyway, but certainly in trouble. Seas. Um, look, coming out of covid, we were pretty aggressive. We had 20% in that part of the market. We've cut that back to 67% now. There are select opportunities there that we will continue to pursue.

Speaker 1:
But, you know, in general, alongside a more cautious, up in quality approach that we're pursuing kind of seeing our opportunity set shift away from there, uh, towards the high quality double bs and triple beats.

Speaker 0:
So how do you think investors should think about high yield at this stage in the cycle? Is it Is it a good time for a strategic or a tactical asset allocation

Speaker 1:
to it? Well, that's a good point. I mean, you need to think about it strategically and tactically. Um from a secular, ongoing perspective. I think everyone should always have an allocation to high yield. I mean, the numbers are pretty clear on that. There aren't many things that look better over the long term on a risk adjusted basis than the global high yield asset class. So delivering most of the return that equities have over the past 20 years with a fraction of the volatility, that's a pretty powerful story.

Speaker 1:
Uh, the tactical case is a little harder to make. Um, yeah, look, we like it on a yield basis, but we've got this valuation conundrum on a spread basis. It's perhaps, you know, leaves a little more to be desired. So, you know, I think a fair way to approach it would be if you had no high yield, you ought to have some. Would you be at your maximum high yield allocation here? Well, no, I don't think so. And that it was really in line with sort of how we're thinking about the outlook for the market

Speaker 0:
and what's liquidity like in the high yield market. At the moment,

Speaker 1:
liquidity is always

Speaker 1:
fairly challenged and high yield, but I don't think it's especially challenged at this point in time, Um, we're obviously mindful as a daily dealing fund that we need to provide that liquidity to investors. So that's an ongoing part of how we manage the portfolio. Um, but in terms of challenges we've seen this year, potentially a few in in March when the the banking crisis was perhaps at its at its peak. Um, but in general, liquidity conditions have been fine.

Speaker 0:
So in summary, how are you or how do you think you're best able to add value in this market environment? What? What what are going to be the keys to out

Speaker 1:
perform? Well, the way we approach high yield at a is is very different. In our global high yield fund, we take a very concentrated approach. High yield is all about the bottom up. Um, but we take a much more concentrated approach to stock selection. We got good analysts, good ideas. We don't want to. We want to be able to focus on getting the most out of that.

Speaker 1:
Um, we also take what an index agnostic approach. So we're happy to shy away from some of those big benchmark weights in order to find you know the best ideas that we can. And so, really, it will be about stock selection. It will be about focusing on the bottom up Alpha generating ideas and getting those investment calls right as we move through the cycle.

Speaker 0:
Tom Hanson. Thank you. Thank you.