Niklas Edman, portfolio manager of the Carnegie High Yield Select fund, has stated in his most recent note that the outlook for 2019 suggests net returns will be driven mainly by coupons minus fees.
The fund, which launched a year ago, has returned some 3.8% in SEK for the 12 months to 2 November, which puts it in the top decile out of some 118 peers, but with the number of risks in the market, investors need to take heed of fluctuations that could occur in the sector, Edman notes.
“Geopolitical tensions and trade wars have become daily fodder in many corners of the world. In Europe the focus has among others been on various parliamentary elections, Italy’s budget work and Brexit negotiations. On the other side of the Atlantic a regularly tweeting Mr Trump has initiated a trade war through various sanctions against those who do not agree with him, sanctions that partly are behind the reduced output of oil that has caused the price to shoot up,” Edman notes.
“On the central bank front we have a growing discrepancy between the ECB, which has continued with a very expansive position, and the American Fed, which continues to tighten through interest rate hikes.”
“The market does not like uncertainty and has been negatively affected as a direct result of this global unrest, and we have seen a general ‘risk off’ sentiment and big outflows on a global basis. Despite this the High Yield Select [fund] has stood up well and delivered a competitive return, something that apart from the impact of our holdings also partly can be linked to the Nordic region’s generally better risk climate during the period in question.”
The distinctions in performances noted in different regions is important to remember as an investor, Edman suggests, because of the link between sentiment towards high yield and changes to margins at the company level. The US has seen negligible changes to company margins but instead hikes to long term rates by an aggressive Fed. In the Nordic region, developments are characterised as more stable. But for an investor taking a position in SEK, these differences are noticeable; as while a portfolio of US bonds may have served up a 2% return in dollars, the SEK return would have been -1% because of the differential in interest rates between the US and Europe.
The Carnegie High Yield Select’s focus on Nordic companies paying higher coupons in turn means that coupons account for the greater share of returns, rather than changes to prices or changes to interest rates, Edman’s latest note explains.