Short Dated High Yield Value Strategy

The strategy

The position

Active global investment process capturing Value in short dated high yield bonds

The method

Screen for mispriced bonds in terms of leverage and spreads. Bottom up credit analysis focused on cashflow generation. Risk adjusted approach to returns

The target

Excess returns over the BofA Merrill Lynch 1-5 Year BB-B Global High Yield index Ex Perpetuals

General features

  • Bottom-up driven investment process
  • Investment across 80 to 150 issuers globally
  • Majority of investments in bonds rated BB-B
  • Detail risk framework with overall risk of 90% to 130% versus benchmark OAS risk
  • 95% hedged to base currency on a 3 month rolling basis
  • Daily liquidity UCITS fund structure

Value Philosophy

At Sparinvest, we define Value in credit as follows:

  • Fair spread is determined by probability of default and loss given default
  • Lower leverage leads to lower probability of default as issuers have more headroom for adverse events
  • Therefore, Value in bonds is high spread relative to leverage where the margin of safety is the difference between spread and fair spread

Value in credit is not:

  • High spread bonds in general
  • Bonds of companies with low price/book equity ratios

Investment Process

Our process is focused on three sources of excess performance:

  • Investing in companies that have low leverage relative to their bond spread. The starting position of lower leverage provides an opportunity to profit from spread compression or lower expected defaults*
  • Capturing size premiums from investments in smaller issues and issuers
  • Investing in out-of-favour situations after significant re-pricing events

The majority of the portfolio will be represented by the first part, whereas parts two and three will rarely exceed 20% of the portfolio.

*In-line with research by Corriea et all (2011): Value Investing in Credit Markets

Investment Process Illustration

Core Value

Proven Cashflow

Low leverage relative to spread

Size Value

Smaller issue(r)s

Off benchmark

Proven business

Opportunity Value

Out-of-favour

Event driven

Proven business

Investment Process Highlights

Screening is critical when investing in a global universe with around 1,300 bonds in order to deploy analyst attention on the best risk adjusted opportunities.

  • Two team members focused on maintaining and developing screening as a standalone source of excess performance
  • Bottom up credit analysis is performed using standard templates across five areas of analysis and ESG is an integrated part of the investment process.
  • Financial – where focus is the issuer’s cashflow generation
  • Structure – where focus is on debt structure, relative positioning, documentation and pricing
  • Business – where focus is on understanding the business using Porter’s 5 forces
  • Technicals – where focus is on understanding liquidity, market technical and access to capital markets
  • Red flags – where focus is on mitigating fraud risk and ESG risks in portfolio companies. Given historical experience, fraud is a major driver of “unexpected” losses and therefore we have a 12 Red Flag system to identify early on potential fraud candidates

We have a detailed risk framework where spread contribution is our main risk metric versus our benchmark

  • We target a long term risk level of 110% of benchmark spread risk
  • Overall risk range of 90% to 130% versus benchmark (OAS)
  • Relative limits on rating, sector and region in terms of weight and risk exposures
  • Individual issuer limit of 2.5% (relative)

Team Experience

The Global High Yield funds are managed within the Sparinvest Value Bonds team consisting of 13 investment professionals. Three portfolio managers have focus on the Global High Yield strategy out of a pool of six portfolio managers with an average of 15 years of experience:

Maciej WoznicaMaciej Woznica is the Chief Portfolio Manager in Value Bonds and joined Sparinvest in January 2015. Prior to this, he setup and lead the high yield team at Nordea Investment Management for seven years. He began his professional career in Corporate Finance at Goldman Sachs in London. He has been active in credit and distressed debt since the 2002. Maciej holds a BA degree in Mathematics & Computation from University of Oxford.

Jacob Beck PetersenJacob Beck Petersen is a Senior Portfolio Manager in the Value Bonds team. He has been a high yield portfolio manager since 2009. He started his career at Nordea Investment Management where he worked together with Maciej Woznica. He holds a Master degree in Business Administration and Commercial Law from the Copenhagen Business School.

Morten Steen PetersenMorten Steen Pedersen is a Junior Portfolio Manager in the Value Bonds team. He joined Sparinvest in 2016 from Nordea Investment Management where he worked as portfolio manager within European investment grade. He holds a Master degree in Finance from the Aarhus School of Business and a Certificate in Quantitative Finance.

The PM’s are further supported by 5 credit analysts and one credit trader.

Unique Selling Points

Fund

Low exposure to interest rates
Only 2 loss making years within the last 17
Historically, the most attractive risk adjusted returns in corporate bond segment

Investment Process

Structured global Value screening process
Fundamental bottom up credit analysis
Risk adjusted return focus

Operational Information about the fund

Name Sparinvest SICAV – Value Bonds – Short Dated High Yield
ISIN EUR I (Institutional share class) LU1599094098
ISIN EUR R (Retail share class) LU1599093520
Income Type Accumulationg
Subscription Fee Class I (Institutional investors) 0%
Subscription Fee Class R (Retail investors) Max. 3%
Management Fee Class I (Institutional investors) 0.5%
Management Fee Class R (Retail investors) 1.0%
Base Currency of Sub-fund Euro (95% of other currencies are hedged to EUR)
Legal Structure SICAV
Fund Management Group Sparinvest S.A.
Initial Subscription Period 2 Mai 2017 – 16 Juni 2017
First NAV Calculation 19th June 2017, published 20th June 2017

Last update january 20 2017

Get in contact

If you want to learn more about Sparinvest, our investment strategies or investment funds you are very welcome to contact us


Mission

Our mission is to deliver the best long-term performance with a strong emphasis on risk. Based on a systematic and objective approach to investment - and a great commitment.

 

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