Resisting temptation
Meanwhile, Schoenhaut refers to 2015 as a “very neutral year” for performance, claiming that the fund managed to dodge larger losses by avoiding the temptation to be the highest yielder.
“Absolute return in 2015 was definitely not very rewarding, or even strongly positive, but we did side-step some of the biggest challenges over the course of the year,” he says.
Schoenhaut pinpoints the oil price slump and the knock-on effect this had on the energy sector, which dominates high-yield investments. “The highest yielders, particularly in the US, were very heavy in utilities and CCC energy, like some of our competitors, because you got higher yield there. But as it turned out, they suffered disproportionately throughout 2015,” he says.
“Our approach was to be attractive but not the highest yielder. This mitigated that downside tremendously.”
A three pointer
The fund uses three benchmarks based on its asset allocation: the 40% Barclays US High Yield 2% Issuer Cap, 35% MSCI World and 25% Barclays Global Credit indexes.
“Benchmarks are always a tricky subject on a portfolio like this, given there aren’t really any defined yield indices,” says Sheikh, adding that the three indexes serve as a guide to investors on the risk they are taking rather than as an instrument against which performance is measured.
Schoenhaut says: “The old world of strategic asset allocation, where a benchmark reflects your asset allocation, is not very useful to us in this type of mandate.”
Unlike other mutual funds, active share, which is the measure of the percentage of stock holdings in a manager portfolio that differ from the benchmark index, is not a strategy the fund uses.
“We do not ask our managers to think about a benchmark at all,” he says.
Adds Schoenhaut: “Their objective is not beating the benchmark. We want them to hold a portfolio of income-oriented securities where they think the income is attractive relative to the risk they are paying.”
Aiming high
The portfolio’s predominantly US weighting is currently made up of high-yield bonds, preference shares and non-agency mortgages. When asked why it shies away from European high yield, Sheikh claims the US offers more attractive yield.
“We think US high yield is a much better investment. When we want to pick up yield carry across the European region, because we by and large do buy into the ECB story, we find it much more appealing to do that in the equity part of the portfolio,” he says.
As an asset class, equity represents around 25% of the portfolio. Global equity takes up the biggest chunk (13.2%), while European and emerging market take a back seat.
“Roughly a third of the equity side of the portfolio is in the US. However, dividend yields in common equities in the US tend to be much lower than across the world, so we do find some better opportunities outside the US,” says Schoenhaut.
He adds that the fund’s approach is to stay away from very expensive sectors such as utilities and telecoms and invest instead in financials, ranging from banks to insurance companies and asset managers.
“Financials has been a tilt that has been somewhat dramatic,” says Schoenhaut. “It is not expensive yet and we are just starting to realise the benefits from interest rates moving a little higher. This means we are able to access some attractive yields in less expensive areas of the market where we aren’t fighting against a massive flow of assets and valuation pressure.”
