When the anomaly of yields perched on zero or even below persists, investors are looking for that difficult balance between higher yield and controlled risk. Often the interest is placed on the high yield marketland as fertile as it is impervious.
Growing high yield market
In recent years this specific sector - made up of issuers with a rating level below "investment grade" and therefore "speculative" - has had a progressive increase so as to count at European level a volume of 434 billion, quintupling the value in 10 years (it was 100 billion in 2012).
According to the best-known rating agencies (Fitch, S&P's and Moody's), issuers rated "speculative grade" have ratings ranging from BB+ (for the first two, Ba1 for the third) up to B- and B3 and then go down further into area C.
The share of Italian broadcasters it is worth about 70 billion and the most represented sector is the banking one, followed by commercial services, telecommunications, insurance.
Finding the balance is crucial
The underlying theme for this type of investment, with much more attractive returns than the rest of the market, is to identify the correct level of risk for each investor and know the broadcasters inside out.
Ver Capital is an independent management company, focused on the European corporate credit market. It operates with its own group of specialized managers through an open-end fund platform and a closed-end fund platform. The Milanese asset management company, born in 2006, has since then carried out more than 800 investments for a volume of more than three billion euros, it has approximately one billion assets under management in its portfolio and a fifteen-year track record focused in particular on European high-yield bonds, corporate loans and private debt
Andrea Pescatori, CEO and founderand of the Milanese asset management company put the in-depth study of the companies first. “To be able to invest correctly in a company, in addition to the evaluation of the rating agencies, we add our detailed analyzes which above all probe the potential profitability of the companies” says Pescatori. “Indeed, there are companies which, despite a group B rating, have an Ebitda of 30/40% and a strong ability to repay their debt in subsequent years”.
How to keep volatility under control
But to evaluate the most appropriate investment it is necessary not only to look at the company, but also analyze exogenous elements and in particular volatility, often the result of expectations of monetary policy decisions. Also in this case Ver Capital has a proven strategy. “You can cope with volatility by controlling the duration of the issuessays Pescatori.
In fact, Ver Capital has a sector in its portfolio dedicated to super shorts. “In our Fond Short Term we have 128 issues from 104 broadcasters with BB-/B+ ratings that have an average residual life of 0,8/09 years. These produce an average yield of 2,6% with an average coupon of 3,4%” they tell Ver Capital. Since this fund was born in November 2020 the average return was 0,86% and in 2021 alone by 0,69% "a return also appreciated by retail customers as an alternative to choosing to leave cash in current accounts" they tell Ver Capital. According to Bank of Italy data, last year Italians left 1.800 billion in current accounts mostly due to uncertainties. In Ver Capital's short-term fund, Italy represents 24%, followed by France (13%) and Germany (11%) and Holland (9%) but there are also issuers from the USA, Mexico, Japan, Great Britain. The most popular sector is the banking sector with a 13% share.
For duration around 2 years, yields are above 3%
In addition to the super short fund, Ver Capital has a slightly longer duration high yield portfolio that includes both bonds and loans with an average duration of 2-3 years, positioned in many sectors including Tlc, software, retail, automotive. In this case the average return is 3,4%. “In this moment in which winds of monetary tightening and geopolitical tensions are blowing, the loan and short sectors are showing the most positive signs, while the others suffer a little more'“ underlines Pescatori who still forecasts for 2022 constant growth of the market, confirming last year's growth of about 7/8%.
