The Liontrust GF High Yield Bond fund has become remarkable because of one thing: a dividend yield of 10%. It is one of the few funds available to retail investors across Europe that is currently offering double-digit returns. Although the fund focuses on high yield (junk) corporate bonds, it also invests in higher quality corporate bonds, government bonds, cash or assets that can be turned into cash quickly. How risky is the fund? The fund holds several corporate bonds with an average rating of ‘BB’, or one notch below investment grade, across the portfolio. “It has a very high quality credit rating, I would say,” said Donald Phillips, one of the portfolio managers behind the fund. “The top 10 holdings, I think, reflect the overall risk of the portfolio.” According to Phillips, the fund holds relatively “conservative” assets such as “BB+” rated bonds issued by the world’s fourth largest iron ore producer, Fortescue Metals, which pays 6.125% semi-annual coupons. …we thought it was quite an interesting unique opportunity. fund manager, Liontrust GF High Yield Bond Fund Donald Phillips He also holds debt considered relatively riskier by rating agencies, but which Phillips says has been mispriced. These usually pay more in terms of coupon rate. The fund manager cited bonds issued by German manufacturer CeramTec as an example. The ceramic component maker’s products are used in hip and knee replacement medical devices, which Phillips says is a growing and profitable market due to the aging population trend seen in Western markets. . However, the bonds are rated “CCC” – usually issued to companies on the verge of default – due to changes made to their capital structure by their private equity owners. “The rating agencies considered it a CCC, but it can afford that level of leverage and a balance sheet because it generates really strong margins (and) cash flow high availability,” Phillips said of CeramTec. “And if anything, it’s probably poorly rated, in my opinion, and it’s the biggest CCC exhibit we’ve had.” How does the fund earn 10%? While the fund manager attributed around 85% of the revenue generated by the fund to underlying long-term holdings, Phillips also cited examples where his trade timing had a profitable impact. He said the sharp rise in yields on short-term US government bonds and the rise in credit default swap spreads during a US government standoff over the debt limit meant there was an opportunity to capitalize. I guess there is a recession coming, but not a deep recession. fund manager, Liontrust GF High Yield Bond fund Donald Phillips “If you add the January (2024) treasury bill yield to the spread on the CDX index, the yield was 10.5% when we activated this transaction,” Phillips said, referring to the credit default swaps index (financial derivatives that insure against the failure of a company). “So we thought it was quite an interesting opportunity.” The value of a credit default swap increases when the risk of default increases. However, Phillips believed “ultimately there would be an agreement” between the Biden administration and Congress to resolve the debt ceiling issue without risking a default. Fund prospects and fees Phillips, however, is not blind to the challenges ahead. He predicted a deterioration in credit in the future. “It is clear that there is going to be a deterioration in credit,” he admitted before quickly adding that the fund is equipped to handle such a scenario due to its resilience. Phillips pointed to the resilience of the companies they had invested in to weather a recession potentially on the horizon. “I guess there is a recession coming, but not a deep recession. Not a 2008-2009 type recession, but a recession coming when the blunt tool of monetary policy starts kicking in later in the year. the year, maybe early next year,” he said. said. Comparing his fund to index ETFs, Phillips said he sees value in active management. He pointed out that their fund produces higher returns and charges lower fees than many similar index ETFs. The fund charges investors 0.47% net fees annually, compared to ETFs such as the iShares iBoxx $High Yield Corporate Bond ETF, which is more expensive at 0.49% and pays dividends at 8.16 %. “We’re actually cheaper than the ETF. Also, since inception, we’ve been around 2% ahead of an ETF. And I think that’s a number that’s going to go up,” he said. added.
This high-yield bond fund with “conservative” assets offers 10% dividends
