In a crowded market displaying low spreads and an unwillingness by bank market makers to take bonds onto their books, it is useful and important for fund managers to remain nimble.
In a crowded market displaying low spreads and an unwillingness by bank market makers to take bonds onto their books, it is useful and important for fund managers to remain nimble.
This will be one of the advantages for Henderson’s Horizon Euro High Yield Bond fund, launching in November, says Henderson’s head of credit Stephen Thariyan.
Excessive size is a disadvantage suffered by some of his prominent credit market rivals.
He says: “Some [credit] funds are €5bn or €8bn – which means a 1% position is €50m to €80m, and you cannot trade that. If one day you suddenly decide you do not like for example Peugeot, .and want to trade a large position, you’re stuck.”
Added to this difficulty is the fact banks, which historically took sellers’ orders onto their own books to find a buyer, have cut their dealer inventory by 80% over four years, according to data from Bloomberg of US primary dealer corporate bond position volumes in September.
Even before it debuts, Thariyan foresees capping the new fund at below €2bn, “which is the only way you can be sure to consider the alpha”.
He describes the credit spectrum as “still a great stock picker’s market”, but at the same time concedes: “I have been in the markets for the last 20 years and I have never been in a more difficult market.
Thariyan (pictured) acknowledges even some of those investors attracted by the yields above debt ask him if the game is over for credit.
Research from Bank of America Merrill Lynch from June found yields were as low as they have been since 1958.
Thariyan says: “The amount of money coming into credit funds has been phenomenal and it will not stop. People want to own yield, so they are going towards high yield and emerging markets debt. But we have not got to the opint yet where we have run out of juice in the credit markets. There are concerns credit has moved too far and that you could lose money going forward, but if you are active and flexible, I would argue that the opportunities are still there.”
