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EU
RO
HIG
H Y
IELD
B
ON
D S
TRA
TEG
Y
For professional investors only
Henderson
1
Strategy review
The Henderson Euro High Yield Bond Strategy was launched in November 2012. Here we review performance since launch and the opportunities ahead.
The period in review
On a total return basis, the strategy rose 8.7% (annualised) since
launch on 19 November 2012 to 31 March 2016, outperforming the
6.1% (annualised) rise in the Bank of America Merrill Lynch European
Currency Non-Financial High Yield 2% Constrained Index.*
The market for European high yield bonds has been supportive
in recent years, thanks to a combination of moderate economic
growth, low infl ation and accommodative monetary policy by the
European Central Bank (ECB). Corrections in the market have
tended to accompany high profi le events such as the capital losses
for bondholders of Banco Espirito Santo in mid-2014, or refl ected
wider macroeconomic concerns such as in early 2016 when soft
Chinese data and US monetary tightening temporarily raised fears
that global growth could stall. Corporate bond markets have made
a robust recovery since February 2016, although the volatility earlier
this year demands that investors have a heightened awareness of the
idiosyncratic risks and strengths of individual issuers.
Performance
The strategy is designed to capture returns by exploiting the strength
of research conducted by Henderson’s credit team, with three key
drivers contributing to performance.
• Active benchmark management: Investment across EUR and
GBP high yield bonds. Conviction views across issuer and security
selection.
• Off-benchmark bonds: Up to 30% of the strategy can be invested
tactically off-benchmark in areas such as investment grade bonds
or non-European high yield bonds.
• Credit derivatives: Widens universe of issuers and provides
liquidity, together with the potential to benefi t from negative views
through short positions.
Summary
Annualised return to 31 March 2016 (%) Strategy Index
1 year 2.6 -0.2
2 year 4.7 2.7
3 year 7.7 5.1
Since strategy launch 8.7 6.1
Source: As per chart below, Index is BofA Merrill Lynch European Currency Non-Financial High Yield 2% Constrained Total Return Index, performance basis as below.
Metric Strategy Index
Yield % 4.9 5.3
Spread (basis points) 468 536
Average bond rating BB- BB-
No. of holdings 132 391
Source: Henderson Global Investors, at 31 March 2016.
Past performance is not a guide to future performance.
1
Past performance is not a guide to future performance.
Performance since launch to 31 March 2016
* Source for the performance and for the chart above: Morningstar, 19 November 2012 to 31 March 2016, total return, bid-bid, gross income, gross of fees, EUR.
-5
0
5
10
15
20
25
30
35
Mar 16Sep 15Mar 15Sep 14Mar 14Sep 13Mar 13
Henderson Horizon Euro Hi Yld Bd I2 EUR
BOFA ML Euro NF HY 2% Const HDGD
%
+21.9%
+32.5%
Investment approach in action
2
Short positioning in single name credit default swaps (CDS)There is no strong overriding theme to short positions since these
are typically on a company basis. We have recently increased our
short position in UK betting company Ladbrokes, as the business
continues to suffer from the structural decline in over-the-counter
betting, together with a potential further negative headwind from
increased regulation in fi xed-odds betting terminals. Another
example short position is Galapagos, a heat-exchanger manufacturer
with exposure to the oil & gas sector. With Galapagos the CDS is
trading in line with the senior bonds but the subordinated (CCC+)
bonds are deliverable into the CDS contract.
Selected use of investment grade An area of tactical interest for the strategy is insurance where we see
opportunities among investment grade stocks. This sector has been
under pressure because of concerns surrounding Solvency II capital
requirements. Insurers have been heavy issuers and this has caused
some re-pricing that has created value in the sector. The decision by the
ECB to include insurers within the scope of the Corporate Sector
Purchase Programme (CSPP) has increased interest in senior bonds
issued by insurers as well as creating spill-over demand for subordinated
debt within the sector. We particularly like NN Group, the Dutch life
insurer, which delivered strong results in 2015 and has a strong capital
position. Similarly, we like Phoenix, which in August 2015 acquired an
investment grade rating from Fitch, the credit rating agency.
The strategy is permitted to invest up to 30% outside of its European
high yield bond universe. Fig 1 indicates the weighting in the strategy
at each rating band at the end of April 2016.
Fig 1: Rating exposure
0
10
20
30
40
50
60
70
Cash &DerivativeBacking
NotRated
CCC &Below
BBBBBBAAA/AA/A
Index %
Strategy %
%
Source: Henderson Global Investors, at 30 April 2016
Focus on researchIt is part of our investment philosophy for all of our credit strategies
to be research-driven, hence our large team of credit analysts
covering developed and emerging, investment grade and high yield.
The need to focus on research is moving fi rmly into the spotlight as
idiosyncratic risk increases. The strategy is running with an overall
credit quality that is higher than the index as refl ected by the
strategy’s aggregate yield and spread being lower than the
benchmark (see summary on front page), but at the same time it has
an overweight positioning in CCC rated bonds where good research
can unearth pricing anomalies. The strategy’s size (€187m at 30
April 2016) allows it to be nimble in terms of trading cash bond
positions, with credit derivatives potentially offering more rapid
portfolio alterations.
Finmeccanica – potential rising starFinmeccanica is a global player in aerospace, defence and security
based in Italy, where the company is involved in the high technology
sector. Political reluctance to allow the company to dispose of
underperforming heavy industry subsidiaries had been a drag on
earnings and effi cient use of cash but the political climate has
recently become friendlier towards restructuring.
Potential • The company appointed a new CEO in May 2014 who publicly
stated a target of achieving investment grade status by 2017
and is committed to deleveraging.
• He has made good headway on asset disposals, selling the non-
core rail division in 2015.
Opportunity • Currently rated BB+ by Standard & Poor's, we believe the
company has the potential to be a ‘rising star’ – a company that
moves up from high yield to investment grade.
Grupo Antolin – designs on an upgradeGrupo Antolin is a leading supplier of automotive interiors, mainly
headliners/ceiling panels and door trim panels with a smaller position
in seating and a growing interior lighting business. The company is
based in Spain with production facilities around the world and in
August 2015 acquired Magna’s interiors business.
Potential • Strong management demonstrated by sound fi nancial
performance and strong margins in a competitive segment.
• Magna acquisition completes product portfolio (adding cockpits)
and improves diversifi cation by customer & geography.
• Signifi cant opportunity to improve the profi tability of Magna’s
business which has been run on a highly decentralised model.
Opportunity • Rising profi tability and cash generation we believe should see
leverage (net debt/EBITDA) fall to around 2x by 2018. This
should support a one-notch upgrade from Moody’s to Ba3 and
compression of spreads relative to other similarly rated auto bonds.
EBITDA = earnings before interest, tax, depreciation and amortisation.
Holdings in focus
Current themes
Identifying opportunities within high yield bonds
3
• Default rates are anticipated to remain relatively low in Europe,
aided by ongoing accommodative monetary policy from the ECB
(see Fig 2).
Fig 2: European sub-investment grade 12m trailing default rate, %
0%
2%
4%
6%
8%
10%
12%
14%
Mar17
Mar15
Mar13
Mar11
Mar09
Mar07
Mar05
Mar03
Mar01
Europe – Actual Europe – Baseline (forecast)
Source: Moody’s, 31 March 2001 to 31 March 2016, 12 months trailing default rate; forecast: year to 31 March 2017
• European economic indicators are suggesting improvement in
the corporate outlook for European companies, with purchasing
manager indices among key indicators in strong territory. Infl ation
remains subdued (allowing for loose ECB monetary policy) but
economic growth is surprising positively (see Fig 3).
Fig 3: Eurozone GDP growth, % qoq
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
Q12016
Q12015
Q12014
Q12013
Source: Thomson Reuters Datastream, Eurostat, Q1 2013 to Q1 2016, gross domestic product (GDP) growth, quarter-on-quarter % change, seasonally adjusted
• Spreads and yields at the end of April 2016 were higher than at the
same point a year earlier. The recovery in prices since the sell-off
in early 2016 has been rapid, however, so expectations for further
spread tightening need to be tempered accordingly (see Fig 4).
Fig 4: Spreads and yields remain attractive
3.0
4.0
5.0
6.0
7.0
Apr16
Jan16
Oct15
Jul15
Apr15
300
350
400
450
500
550
600
650
Yie
ld %
Basis
po
ints
Yield to Worst
Spread (rhs)
Source: Bloomberg, 30 April 3015 to 30 April 2016, BofA Merrill Lynch European Currency High Yield Index (HP00), yield to worst, option-adjusted spread over govt.
• Supply is also manageable given that Europe has been able to
absorb gross annual issuance of around €80bn (see Fig 5) without
creating heavy indigestion. Morgan Stanley is expecting non-
fi nancial gross annual high yield issuance in Europe in 2016 to be
similar to 2015 at around €87bn (estimate correct at 31 December
2015).
Fig 5: European currency high yield issuers and annual issuance
0
20
40
60
80
100
0
50
100
150
200
250
300
350
400
450
1514131211100908070605040302
Issuers
Issuance (EUR, bn) (RHS)
EU
R, b
n
No
. o
f is
su
ers
Source: BofA Merrill Lynch, Barclays Research, Bloomberg, as at 31 December 2015. Note: Issuers based on numbers of issuers in HP00 as at end of each calendar year.
Stock examples are intended for illustrative purposes only and are not indicative of the historical or future performance of any particular strategy. References made to individual securities do not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security. Individual stock positions mentioned on these pages were correct at 30 April 2016.
Past performance is not a guide to future performance. Yields may vary and are not guaranteed.
Where are the current opportunities?
4
Markets have largely retraced the sell-off earlier this year as yield
hungry investors were drawn to some attractive yields in the asset
class. Policy moves by the ECB to extend its asset purchases
programme to corporate bonds has also translated into greater
interest in the crossover region of high yield and the inclusion of
senior insurance bonds in the CSPP has resulted in some incremental
demand shifting into the subordinated debt of this sector.
While there is some positive momentum in the market, we are minded
to fade the rally (gradually reduce risk) as prices become richer. The
link between oil/commodity prices and US high yield performance
has been marked of late and may be vulnerable to a correction in the
oil price. Although energy makes up just 5.4%1 of the European high
yield market compared to 13.8%1 of the US high yield market, we are
mindful of the potential for any correction to ripple across the Atlantic
as experienced earlier this year. The US Federal Reserve meeting on
14-15 June, together with the EU referendum in the UK on 23 June
also have the potential to generate volatility in markets that we would
seek to exploit on both the long and short side.
The new issuance market could also provide opportunities. The sell-
off earlier this year delayed issuance, although this picked up again
in April. Cumulative high yield non-fi nancial issuance in the fi rst four
months of 2016, however, was below the levels of the last four years
and with May and July historically the heaviest months for European
high yield issuance, we anticipate being able to put cash to use in the
primary market as a backlog of issuers emerges.
1 Source: BofA Merrill Lynch European (HP00) and US (H0A0) High Yield Indices at 30 April 2016.
Identifying opportunities within high yield bonds
Fig 6: Monthly share of HY non-fi nancials issuance
Source: Morgan Stanley Research, Dealogic, 1995 to 2015. Issuance refers to European HY issuance less expected maturities, and does not account for calls.
Summary
0%
2%
4%
6%
8%
10%
12%
14%
DecNovOctSepAugJulJunMayAprMarFebJan
Average between 1995 and 2015
Henderson Euro High Yield Bond Strategy
Strategy benefi ts at a glance
• High yield bonds tend to offer useful diversifi cation within a fi xed
income portfolio due to their low correlation with government
bonds and greater sensitivity to corporate conditions.
• Variety in European bond issuers together with new companies
entering the market makes for an under-researched market that
can reward good credit selection.
• Offers exposure to the European high yield market, which
is undergoing a period of long-term structural expansion as
companies reduce their reliance on bank funding.
• Selective exposure to derivatives within the portfolio provides
opportunities to profi t from both positive and negative credit events.
• Utilises Henderson’s well-resourced and award winning
credit team, where a global presence allows for thorough
understanding of relative value in European high yield.
Stephen Thariyan
Global Head of Credit13 years of experience in managing Global Credit portfolios, 24 years of investment experience.
Tom Ross, CFA
Portfolio Manager, Absolute Return Credit,
European Credit13 years of investment experience, 9 years managing pan-European absolute return portfolios
Portfolio manager
Henderson has a 48-strong Global Credit Team based in the UK and the US. The team includes investment grade, high yield and emerging
market credit portfolio managers and analysts, who are led by Stephen Thariyan, as well as a dedicated team of traders. It also includes
secured credit portfolio managers and analysts, led by Colin Fleury. The Credit Team is supported by Henderson’s wider Fixed Income Team,
including specialists in government debt, interest rates and currencies, and benefi ts from cross-collaboration with Henderson’s equity teams.
Henderson manages €35.0bn in fi xed income assets*.
*Source: Henderson Global Investors at 31 December 2015
Henderson Global Credit Team*
Past performance is not a guide to future performance.
The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
Important InformationThis document is intended solely for the use of professionals, defi ned as Eligible Counterparties or Professional Clients, and is not for general public distribution. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially. Nothing in this document is intended to or should be construed as advice. Security examples are intended for illustrative purposes only and are not indicative of the historical or future performance of the strategy or the chances of success of any particular strategy. Henderson Global Investors, one of its affi liated advisors, or its employees, may have a position in the securities mentioned in this document. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Issued in the UK by Henderson Global Investors. Henderson Global Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund Management Limited (reg. no. 2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no. 2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered offi ce at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. Telephone calls may be recorded and monitored. Ref: 34S H023135/0516
Contact usGeneral enquiries: +44 (0)207 818 4444Email: european.institutional@henderson.comWebsite: henderson.com/institutional
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