iM Global Partner has announced the launch of the iMGP European High Yield Fund, which will be sub-managed by Polen Capital led by portfolio manager Ben Pakenham.
The fund targets total return constituting income and capital appreciation by investing in a portfolio of European high yield bonds. At least 80% of the fund will be invested in high yield debt securities, with at least two thirds of fund assets invested in securities rated below Baa3 and denominated in euros.
Ben Pakenham leads the management team that includes Adam Tabor as co-portfolio manager and research analyst, and Andrew Carrie and Julien Martin as research analysts.
Commenting on the launch, Pakenham said high yield assets were well positioned in respect of ongoing interest rate and inflation rate expectations: “Interest rate risk is a relatively small portion of what drives high yield bonds given their short duration nature. It is that lack of sensitivity to interest rates, combined with higher yields, that attracts many investors to the asset class.”
“The majority of the yield is made up of the credit risk element, which tends to override what is happening in government bond markets where this is a far greater degree of sensitivity to changing inflation expectations. Although an argument can be made that credit spreads today are on the tight side, we also believe there are compelling opportunities for longer-term investors. The backdrop is a relatively supportive one from a fundamental perspective with even the riskiest issuers able to access capital, at attractive interest rates, which has a self-fulfilling effect of reducing default risk as debt maturities are extended.”
“Furthermore, many industries are operating in bottom-of-cycle earnings environments, meaning that downside risk from here may be relatively muted with earnings growth potential as we look further out. Finally, the starting point yield for high yield is a great driver of long-term returns. A yield of north of 5% in Europe when interest rates are 2% should be compelling on that basis, especially when considering the incremental gains generated through the power of compounding.”
Commenting on the credit quality focus of the fund, Pakenham noted that the investment process would determine where opportunities could be found and in which sectors.
“Our sector exposures are a fallout from our bottom-up investment process. It is almost entirely dependent on where we view the best relative value opportunities in the market to be, on a risk-adjusted basis. Today we are seeing a greater number of mis-pricings in relatively cyclical areas of the market such as consumer-cyclicals, basic industrials and non-bank financials. This is not because we are bullish on the consumer, in fact quite the opposite, but simply because we think the degree to which these companies will struggle is over-stated by the market. At the other end of the spectrum is the automotive space, which is facing cyclical and secular headwinds to an extent that we feel is not being fully discounted by the market.”
According to iM Global Partner, the European high yield market stands at more than €400bn, spread across 800 bonds from 400 unique issuers – roughly one-third of the size of the US high yield market.
Pakenham outlines the geographical definition of ‘Europe’ when selecting securities for the portfolio thus: “Our index is a Euro Constrained index that can include companies outside of Europe that issue in Europe – though this is a small percentage of the total; the US is the largest at 9% and Japan is second with 3%. The fund must be 80% invested in sub-investment grade rated securities and 67% invested in euro-denominated sub-investment grade bonds. We do invest in sterling denominated bonds, which would be off-benchmark, though almost entirely issued by companies domiciled in Europe.”
Key features of the fund include:
- A concentrated portfolio holding approximately 70-90 issuers.
- Aims for a yield premium of 75-100bps compared to the index.
- Relative exposures driven by value and conviction, seeking attractive risk-adjusted returns.
- Bottom-up research is complemented by a top-down view that informs portfolio-level exposures.
- The fund promotes environmental and social characteristics according to Article 8 under the Sustainable Finance Disclosure Regulation (SFDR).
- Structured as a Luxembourg-domiciled Ucits compatible Sicav.
- Reference index is the ICE BofA Euro High Yield Constrained Index
- Euro denominated share classes include iMGP European High Yield Fund C EUR and iMGP European High Yield Fund I EUR.
Julien Froger, managing director, head of Europe, iM Global Partner, commented: “We are absolutely convinced that this experienced team, which has been working together for an extended period, will empower all our investors to access a proven solution. This team operates within a robust, stable, and agile framework that Polen Capital has meticulously developed and refined over decades. This is a timely addition to our iMGP fund range as investors seek strategies that offer different sources of return as well as products that diversify their portfolios. We think this is a compelling offering given that higher base rates are providing elevated yields in the European high yield market.”
Distribution is set to be focused on clients invested in/denominated in euros. iM Global Partner’s main distribution area for UCITS funds across Europe includes France, Spain, Italy, Germany and Austria, although the fund will also be distributed in the UK and there may be some investor demand from the LatAm and US offshore markets, the company stated.
