Wednesday, July 30, 2014
Last year the fund had 45% exposure to high yield, but this has now been slashed to 10%. Financials exposure is up 10% from the end of last year and now accounts for around 40% of the fund.
'We noticed towards the end of last year that the structure of the high yield market was becoming overheated with a lot of covenant light deal structures. When you see these deals being done at ever lower yields, it tends to be time to rotate out of high yield.'
'Improving economic conditions are normally very good for high yield because they are high beta cyclical plays but the yield curve and default cycle have been repressed hugely because the cost of debt is still so low.'
Tuesday, July 29, 2014
deepak gulati founder of .. argentire capital ... long volatility .. volatilities across all asset classes and around the world are starting to look "cheap" ... strategies . in searh of "asymetric payoff potential." That's exactly what he thinks his suggested trade offers ... "you are getting paid to own protection" ... "At this level of voltility, we're long on everything; we can't short anything"
BlackRock, the world's largest asset-management firm, is telling clients that equity-options volatility is now the last cheap asset class in the financial market.
Today the biggest area of unrecognized risk is low volatility. Consider the measures of market volatility, the VIX index on the S&P 500 or the MOVE index on bonds: both are at multiyear lows. Yet we see investors betting against a rise in volatility. We believe this is very dangerous because when volatility has been low — which has been the case for the last few years — then the premium for writing options gets lower at a time when the odds of volatility going lower still become virtually nonexistent and the odds of it rising significantly keep increasing. The VIX rarely drops below 10 for any length of time, and it is currently at 11.4. An investor assuming that the VIX is going lower might perhaps make 6%, but when volatility picks up, and it will — it's just a question of when, not if — then the VIX could reach 20, 30 or 40. Therefore we have a return that's probably one-fifth of the size of the risk being taken. That is what DoubleLine tries to avoid investment positions that have poor asymmetrical risk/return trade-offs.
Most investors have gone into the front end of the yield curve, he said. "The short duration trade has been the preferred trade."
But that's exactly where investors could be the most vulnerable. "When you get to that point in the interest rate cycle, where are the biggest increase in interest rates to be found? In the short end of the curve. This is where everybody thinks they're safe."
'Within the context of this benchmarked strategy we assess that credit risk premia for non-financial senior paper is too low put against initial signs of increasing leverage metrics,' de Coensel said.
'Within financials we see continued efforts in balance sheet deleveraging and recapitalization. Over time this will lead to a situation where credit spreads between senior financial and non-financials will cross towards a situation before the financial crisis and financials require a lower credit spread than on-financials.'
Within the asset class, de Coensel has a preference for US banks, in particular Goldman Sachs, JP Morgan, Wells Fargo and Bank of America, as he believes these have a much better leverage ratio than their European peers.
The manager also likes some bank tier 2 papers – Dutch, UK and Scandinavian names – and insurance subordinated bonds. ‘Companies like Allianz and AXA boast a rich, well capitalised and diversified business model,’ he added.
Monday, July 28, 2014
GL: Next year the Fed is expected to raise US interest rates? What impact will this have on Asia and on the high yielding stocks you hold?
HY: The Fed should raise interest rates, we’re all waiting for it.
That will have an effect on some of the shares we own, so the yields in some of the equities we own I guess will become less attractive relative to quote unquote ‘safer’ fixed income instruments.
But I think for us we’re still looking at the underlying earnings growth of the higher yielding shares so we’ve been quite careful not to have too much of the high yield, super high yield tilt in the portfolio. So we’ve tried to mix in both yield, actual yield, dividend growth and earnings growth so the potential for dividend growth and earnings growth I think will remain unchanged.
Will the yield on equities be as attractive once bonds start to yield 5% or 6% and money that should arguably be in bonds and not equities makes that shift? I’m sure there will be an element of that but with the combination of growth in earnings and dividend growth I think the yielding shares can still perform well.
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