The Federated Hermes Global High Yield Credit Fund celebrated its 10th anniversary on 11 May 2020.
We look at the portfolio from five angles to see what makes it different to its peers and why the asset class may be of appeal to investors, both in the short and long-term.
Presenting the Federated Hermes Global High Yield Credit Fund
Fraser Lundie, manager of the Federated Hermes Global High Yield Credit Fund since its launch 10 years ago, provides a snapshot of the five key attributes of the fund.
With the asset class becoming more global and credit quality
at its highest ever level,
he argues that from a diversification perspective,
the high-yield market has never been as good as it is today.
FOR PROFESSIONAL INVESTORS ONLY
The asset class continues to become more global, with 85 countries now represented.
Global asset class with
Average credit quality
as at end of May ’20
Fraser Lundie, head of credit and lead manager of the fund explains that, “global high yield has historically always been seen as a ‘risk-on’ asset class, at the higher end of the risk scale of fixed income”. However, investors may begin to look at the asset class as a replacement for what they used to gain from dividends given the lack of alternatives for income.
Global high yield has widened in spreads as a result of the Covid-19 pandemic. These new levels will help compensate in what is likely to be a rising default environment.
The quality of the asset class also keeps improving. At the end of May, for the first time ever, the average credit quality of global high yield was BB- as more investment-grade companies have been downgraded to high yield during the pandemic.
Investing across market caps, more companies are being downgraded from investment grade to high yield, with these fallen angels expected to increase in number over the coming months. The team has the flexibility to look at this area of the market and decide to buy, without any major constraints regarding benchmarks.
The fund typically invests in
The credit team at the international business of Federated Hermes looks to allocate capital to the best risk-adjusted parts of the market from a top-down perspective, and then find individual companies from a bottom-up view through a combination of ESG, fundamental and relative value factors.
The fund typically invests in between 100-150 global names, which offers a good balance between idiosyncratic risk and diversification.
Rather than simply choosing different bond issuers, greater emphasis is placed on identifying outperforming securities. This requires a flexible approach to securities which the team has built into the fund’s philosophy.
With substantial ESG resources under one roof, the credit team collaborate with EOS, which contains 20 engagement specialists, in engagement at highest of management and board levels. EOS engaged with 1,043 companies on 2,854 objectives and issues in 2019.
The team collaborates with
EOS engaged with
with 20 engagement specialists
companies in 2019
The team historically assessed companies’ ESG risk alongside core operating and financial risks. Now they are furthering this analysis by using a proprietary pricing model to capture the influence of ESG factors on credit spreads.
This model shows the correlations between an issuers QESG Score – a score developed using best-of-breed external research and insights from the engagement specialists in EOS at Federated Hermes (“EOS”) – and their credit-default swap spread.
“It is an informative analytical tool, enabling us to avoid issuers with tight spreads and low QESG Scores and favour those with wide spreads and high QESG Scores,” says Lundie.
“In addition to the significant resource we have from the EOS team, there is also a lot of crossover with our equity team,” adds Lundie. “Ultimately we are looking at large, global companies, so therefore many of our equity colleagues that sit on the same floor as us will be looking at the same companies, so we will share ideas with them.”
Fraser Lundie, lead manager, has
30 fixed income specialists, managing
as at 31 March ’20
With 16 years’ industry experience, Fraser Lundie has managed the fund since its launch.
Principal team members have worked together since 2004 implementing relative-value credit strategies, forming the core of an experienced and integrated team.
In total the international business of Federated Hermes has over 30 fixed income specialists, managing over $3.2bn (as at 31 March ’20).
The effective duration: 3.95 (30 April 2020).
The fund has just hit 10 years.
Looking back on the fund’s first decade, Lundie says: “We have to be satisfied with the performance, when you look through the time period and how it stacks up. We have been able to demonstrate consistent outperformance versus both the benchmark and our peers.”
As at 30 April 2020 the assets under management in the strategy stood at some $2bn.
The effective yield (gross) in USD terms is 6.27% (30 April 2020).
The average credit rating in the fund is BB (30 April 2020).
Rolling performance (%)
Past performance is not a reliable indicator of future results.
Source: Federated Hermes as at June 2020. Performance presented in Euros for the F EUR Acc share class, net of fees and charges. Fund inception: 11 May 2010. Benchmark: ICE BofA Merrill Lynch Global High Yield Constrained EUR Hedged.
Issued and approved by Hermes Fund Managers Ireland Limited (“HFMIL”) which is authorised and regulated by the Central Bank of Ireland. Registered address: The Wilde, 53 Merrion Square, Dublin 2, Ireland. Telephone calls will be recorded for training and monitoring purposes. HFMIL appoints Hermes Investment Management Limited (“HIML”) to undertake distribution activities in respect of the Fund in certain jurisdictions. HIML is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. Telephone calls will be recorded for training and monitoring purposes. Potential investors in the United Kingdom are advised that compensation may not be available under the United Kingdom Financial Services Compensation Scheme.
The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Any investments overseas may be affected by currency exchange rates. Past performance is not a reliable indicator of future results and targets are not guaranteed.
For professional investors only. This is a marketing communication. This document does not constitute a solicitation or offer to any person to buy or sell any related securities, financial instruments or products; nor does it constitute an offer to purchase securities to any person in the United States or to any US Person as such term is defined under the US Securities Exchange Act of 1933. It pays no regard to an individual’s investment objectives or financial needs of any recipient. No action should be taken or omitted to be taken based on this document. Tax treatment depends on personal circumstances and may change. This document is not advice on legal, taxation or investment matters so investors must rely on their own examination of such matters or seek advice. Before making any investment (new or continuous), please consult a professional and/or investment adviser as to its suitability. All figures, unless otherwise indicated, are sourced from Federated Hermes.
Federated Hermes Investment Funds plc (“FHIF”) is an open-ended investment company with variable capital and with segregated liability between its sub-funds (each, a “Fund”). FHIF is incorporated in Ireland and authorised by the Central Bank of Ireland (“CBI”). FHIF appoints Hermes Fund Managers Ireland Limited (“HFMIL”) as its management company. HFMIL is authorised and regulated by the CBI.
Further information on investment products and any associated risks can be found in the relevant Fund’s Key Investor Information Document (“KIID”), the prospectus and any supplements, the articles of association and the annual and semi-annual reports. In the case of any inconsistency between the descriptions or terms in this document and the prospectus, the prospectus shall prevail. These documents are available free of charge (i) at the office of the Administrator, Northern Trust International Fund Administration Services (Ireland) Limited, Georges Court, 54- 62 Townsend Street, Dublin 2, Ireland. Tel (+ 353) 1 434 5002 / Fax (+ 353) 1 531 8595; (ii) at https://www.hermes-investment.com/ie/; (iii) at the office of its representative in Switzerland (ACOLIN Fund Services AG, Leutschenbachstrasse 50, CH-8050 Zurich www.acolin.ch). The paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1/am Bellevue, P.O. Box, CH-8024 Zurich.