It is in Greenwich, Connecticut that SKY Harbor Capital Management anchored itself in 2011. SKY stands for the initials of the surnames of founding trio Hannah Strasser (pictured), Thomas Kelleher, and Anne Yobage (Thomas Kelleher left the firm since April 2018).
All three were fellow colleagues at AXA Investment Managers where Strasser was US fixed income chief and senior portfolio manager from 2001 to 2011 while Yobage held roles of co-head of US High Yield and senior portfolio manager, and Kelleher was a former senior high yield portfolio manager.
Backed by US private equity firm Stone Point Capital, the company runs two high yield credit strategies, including short duration high yield – developed in 1992 by the founding trio – and broader high yield, in addition to customised mandates for insurance companies and pension funds.
In Europe, the $5.8bn (€4.9bn) AUM boutique has marketed two Ucits funds since 2012 through the SKY Harbor Global Funds Sicav domiciled in Luxembourg: the US Short Duration High Yield and US High Yield funds.
Despite its US roots, some two-thirds of AUM derives from European investors, while institutional mandates and relationships account for about 80% of AUM.
“Flows in our high yield strategies have been pretty stable as relative performance in our strategies has been strong,” explains Hannah Strasser, cofounder and managing director.
“Our portfolios are positioned away from the part of the high yield market that is the most sensitive to rising rates and bond repricing.”
The US high yield market has faced consistent outflows throughout 2017 and into this year, Strasser observes. However, she says the market has proven stable on technical factors because it has shrunk in size as new issuance has fallen short of retirements.
“More companies have been upgraded to investment grade than downgraded to high yield, which along with the cash generated from coupon income, has created a support for the market despite mutual fund outflows. That has allowed investors and managers to experience less selling pressure despite outflows. That is a key point when we look at the markets overall,” Strasser explains.
SKY Harbor Capital Management has been generally overweight shorter duration debt, benefiting from credit picking in low single ‘B’ and triple ‘C’- rated bonds depicted by Strasser as “neither the most speculative bucket of the high yield market nor the part trading at equity-like levels.”
The firm generally avoids the highest yielding part of the market because many issuers here face significant secular pressures, for instance at a sectorial level – in sectors such as pharmaceuticals, retail or energy, Strasser explains.
Returns are generated through credit picking among bonds of companies the firm expects to be able to live within their existing capital structures and that do not require restructuring their debt due to poor financial results.
“We are invested in companies benefiting from tax reform, from a rollback of regulation or generally stable commodity markets. Synchronised global growth is also supporting very strong underlying corporate earnings in the US. We are buying bonds of these trends and not those which face large secular headwinds,” she states.
As the pace of US Federal Reserve rates hikes may accelerate, tighter spreads could be on the way in the US high yield space.
However, Strasser explains that historically, high yield credit has been less correlated to rate rises than the broader bond market and the asset class rather benefits from the underlying strength of economic activity that is behind tighter monetary policy.
“Investors are questioning how much spread compression high yield can experience in this hiking cycle given the tightness of current spreads. We think the path to tighter spreads will be volatile but strong fundamentals and low default-related loses will result in tighter spreads as rates rise.”
One market belief is that high yield credit and environmental, social and governance criteria remain difficult to conciliate within a strategy. Yet ESG issues are definitely considered by SKY Harbor Capital Management in its investment process, Strasser explains.
The high yield market is challenged by the fact most issuers are non-public companies, meaning disclosure of information tends to be lower.
“Because the current US administration is rolling back certain filing requirements, transparency is unfortunately going down not up, in the short term at least. We believe initiatives that demand more transparency around certain ESG issues can put pressure on these companies.”
As an asset manager, the business has joined several initiatives, including the United Nations Principles for Responsible Investment, the UN Women’s Empowerment Principles and the Thirty Percent Coalition, all reflecting the firm’s values about environment, social, governance, female leadership, pay equality and diversity in the workforce, Strasser says.
The UN PRI is a respected standard, especially for non-US investors, she argues.
“We have a large presence of Nordics-based investors in our funds for instance, and we want to be aligned with the values our investors want to uphold as capital owners.
“We are very focused on the concept of ESG-related risks. If you look back at the history of the high yield market, in its earlier guises, it was almost a dumping ground for companies that had disclosed or undisclosed ESG issues. Identifying and assessing ESG-related risks is embedded in our investment process. And we continue to work to deepen our analysis and knowledge as capital owners increase their emphasis in this area,” she underlines.
The approach means that some industries, such as coal, have been put aside as investment areas. And it is the case that increasing numbers of capital owners demand management of customised mandates with carbon restrictions, which means the company is carefully considering the long-term financial flexibility of a number of industries.
“The coal industry has been largely bankrupted as capital owners restrict their investments in the industry. The same thing might happen in the ammunition/firearms industries, two sectors that we also avoid. The debate on the impact of fossil fuel is ongoing, but it will still be financeable in the public market to some extent in our view,” she says.
The investment manager also believes gender diversity is a topic that resonates with investors that are aligned with the UN Sustainable Development Goals given that gender equality is number five on the list.
“It’s also a concept that is more tangible, with the ability for outcomes focused measurement. As a result, we are increasingly integrating an assessment of gender-based diversity into our opinion of an issuer’s fundamental strengths and weaknesses.”
Asked about the perception of European investors towards US high yield, Strasser says that currently, the cost to hedge US dollar asset allocations back into euros is high enough that allocations to US high yield have slowed – and that despite the positive view that investors might have on the fundamental strength of the asset class.
SKY Harbor Capital Management has a German subsidiary in Frankfurt. Strasser says France, Switzerland, Luxembourg and Spain are key markets for the boutique.
“We are moving more aggressively into the UK. In the Nordics, we have had a notable presence given that we run mandates for some large investors there.
“Switzerland is a priority for us, Germany too. We see a nice market share opportunity in Spain where our funds are well positioned already. Furthermore, we have new distribution relationships to help develop the business in Portugal, Italy and the UK,” she adds.
A concept SKY Harbor Capital Management “would be eager to explore” and in which potential investors have expressed interest in, Strasser pinpoints, remains that of a sustainability-focused short maturity high yield strategy that would be aligned with the constraints and values of European and US sustainable investment forums.
This article was first published in the June 2018 issue of InvestmentEurope.