Blockbuster bond manager Bill Eigen has nearly doubled his exposure to the high yield bond market almost exactly a year after telling investors to consider selling out of the asset class.
The Citywire + rated manager, speaking at an investor roundtable for his $7.05 billion JPM Income Opportunity fund on Wednesday, said he had slashed his high yield exposure in 2014 by almost 50% as part of an ‘exit process’ but had opted to reverse this trade after a prolonged period of market dislocation, particularly in the high yield energy sector.
He has moved from an 18% weighting to a 33% allocation in high yield bonds, which includes buying a high yield ETF for the first time in his career, with around 2% now allocated to energy-specific issuers.
Discussing his initial decision to sell out of the sector, Eigen said he was able to sell positions easily over the past year because investors were attracted by ‘the hunt for yield’.
He said: ‘I took advantage of that and sold down my high yield. After that high yield was about 6% up but then it got to May or June and it gave back all those returns in the second half of the year. So you ended up getting no return on an asset class.’
‘That attracted me and the reason that happened was this – technicals. When you have this many people moving out of the asset class and the dealer community with all-time low inventories, guess what, price movements are going to be exacerbated downwards.’
Eigen said the decision for many people to move out of the market came despite default rates staying low and, in his opinion, fundamentals remaining strong. He did accept that the sudden and significant impact of the oil price drop had hurt issuers in the energy sector.
‘You had a hiccup in energy at the end of the year, which is going to cause some defaults downstream but not in the near term, in the near term it just creates incredibly attractive prices.’
‘A lot of these securities that can withstand $40-50 oil for quite a long time and are adapting to that, we have seen that with the decline in the rig counts in the US. We have seen that with declines in capex and headcount reductions in E&P [exploration and production] firms.’
Eyes on E&P
The Boston-based manager said he had moved heavily into mid-cap exploration and production companies, which had been aggressively priced down by markets.
‘Regardless of what oil did, in a normal environment these senior bonds would have expected to have gone down five to 15 points, they didn’t do that. They went down 15 to 40 points because the liquidity is so bad, we were able to pick up bonds I had no interest in at par and come up with five, six per cent nominal yields.’
‘We were picking them up at 50 or 60 cents on the dollar and these are companies which have years of runway before they would have to do something in response to even $40 oil. But they just get thrown out with everything that is happening in the market, and with everyone redeeming, the prices get exacerbated downwards.’
The JPM Income Opportunity fund lost 0.6% in US dollar terms over the past 12 months to the end of December 2014. This is while the average manager in the Alternative Ucits – Bond Strategies sector returned 1.76%. On a three-year basis, the fund returned 7.5% while the average manager returned 8.7%.