The nice thing about a global, high conviction approach is the ability to take advantage of interesting market dislocations. While high yield is certainly an idiosyncratic, stock selection-focused asset class, our global opportunity set helps frame our hunting ground. For example, US BBs are trading almost 100bps wider than European BBs – a reversal of the two-year trend of European BBs offering wider spreads than their American counterparts. For BBs, the US looks like the most interesting place to go.
In single-Bs, the indices are on top of each other in spread terms, despite a long period of wider single-B spreads in Europe. Here we can be agnostic, and an interesting difference between US dollar and European high yield means that we can look for opportunities in different shapes of returns.
US high yield comes with higher coupons, meaning greater cash price stability, price upside potential past par and greater carry from holding a position. Meanwhile, European high yield has typically offered lower coupons. While you have less upside potential past par, a bond’s cash price can fall sharply on spread moves that would affect higher coupon bonds less. So why buy those bonds? Your shape of return is different. If you expect a sharp recovery in an issuer’s bond price after an indiscriminate sell-off, the lower cash price bond will likely outperform over the short-term. An interesting example of this in the period was Ball’s euro 1.5% 2027s versus their US dollar 4.875% 2026s. Ignoring currency effects for simplicity, from the lows to the end of March, the euro 1.5% coupon bonds have outperformed the higher coupon dollar bonds by 8.6%. But, over the longer term, the lower price volatility and greater carry has made the US dollar bond a better investment.
So if you only bought one, you may just own the US dollar bond. But what if you can have both? Adient is a seat supplier to the automotive industry and has its challenges, but we believe it is an interesting company and a good case study for the power of global. Adient’s euro 3.5% 2024s have rallied sharply from their lows of ~62, and are now trading just shy of 80. Last month, the company brought a new, US dollar first lien secured 2025 bond with an attractive 9% coupon. We can now have exposure to Adient through both high capital price upside potential euro bonds, as well as greater downside protected and attractive carry offering, secured US dollar bonds. By blending these two shapes of return together, and across different parts of the capital structure, we hope to achieve superior risk-adjusted performance versus just owning one of these bonds.
By flexing the global opportunity set, we hope to add material incremental value to our funds in ways that are simply not available to single-region portfolios or to funds that are beholden to benchmark weights.