The Swiss banking group Syz & Co is celebrating the 10th anniversary of Oyster European Corporate Bonds, the sub-fund of its Luxembourg UCITS Sicav Oyster, investing in European corporate bonds.
The fund, which has been advised by Andrea Garbelotto since it was launched, ranks in the ninth percentile over ten years. These good performances are also confirmed over three years and the current year, with a ranking in the first quartile.
The results are attributable to active and opportunistic management that makes the difference by having several sources of performance such as macro-economic forecasts, bond picking and duration management. The far-reaching changes in the credit market since the financial crisis have altered the sources of performance, as country risk management and sector choices have become more important than duration management. These changes make the game more open and currently afford numerous opportunities.
Its “top-down” management approach is based on a macro-economic scenario that allows an allocation to be made between financial and non-financial securities and between countries and sectors, and the portfolio’s duration to be determined. The bonds are then selected as a function of different criteria, including issuer quality, liquidity and the yield on the issue.
Until June 2007 this market was characterized by low volatility and limited changes in credit spreads. In contrast, over the last five years it has experienced much greater and more sudden movements. This is because the 2008 financial crisis led to a deep change in the structure of the corporate bond market, which was manifested in a lowering of its average credit quality and in a reduction of the weighting of financial issuers. AAA issuers have thus disappeared and A and BBB ratings today account for nearly 85 per cent of the market, as against 55 per cent in 2007.
The proportion of BBB issuers in peripheral Europe, that is, Italy, Spain, Ireland, Portugal and Greece, has tripled and there are virtually no issuers with an A rating or higher left in those countries. The sectoral breakdown of the market has also changed greatly following the financial crisis. In fact, the restructuring of the banking institutions and the downgrading of the rating of their subordinated debt have reduced the weight of the financial sector from nearly 60 per cent in 2007 to less than 50 per cent today. These various changes have led to a change in the performance drivers in corporate bonds management, with country and sector risk assessment becoming more important than duration management.
Credit spreads have narrowed significantly over the past two years to return, in the case of high-quality core issuers, to their pre-crisis levels. However, owing to “country” risk, issuers in peripheral Europe still offer yields higher than before the crisis and therefore worthwhile investment opportunities. The subordinated financial debt market is also a source of opportunity because following the new regulations in the financial sector (Basel III and Solvency II), banks and insurance companies should be repaying early a part of their subordinated debt. The yield on this type of bond is therefore attractive with, in addition, a relatively short maturity.
Currently the fund is overweight in the peripheral countries, in particular Italy, and underweight in the core countries (Germany, France). This is because the manager takes the view that investors appear to be particularly conciliatory in the way they value the country risk of France compared with that of Italy. Financials are slightly overweight, mainly through subordinated bonds in insurance companies. The portfolio is also significantly overweight in BBB issuers (62 per cent compared with 37 per cent for the BofA Merrill Lynch EMU Corporate index). Consequently, while the average duration of the portfolio is close to this index, the average yield at maturity is 3.5 per cent, which is approximately 60 per cent higher than this index return (2.2 per cent).