Five Year Performer: Investec Monthly High Income's Roane

Investec’s Kieran Roane talks to Cherry Reynard about why he has been defensively positioning his Monthly High Income fund lately.

The high yield market has been well supported by investors hungry for yield, but its popularity may wane if the current risk aversion continues. For Kieran Roane, manager of the Investec Monthly High Income fund, it will be a validation of the cautious stance he has taken over recent months on the back of concerns over the high oil price and European sovereign debt.

The defensive positioning of the fund has hurt performance relative to the wider Sterling High Yield Bond sector over the short term, but performance still stacks up well over the longer term. The fund has delivered 28.5% over five years, leaving it sixth in the sector. It has also delivered a yield of 7.95% in spite of its focus on higher grade credits that tend to pay a lower income.

This cautious stance saw it fall less than the wider sector in 2008, but marginally lag rising markets in 2009. Roane believes the fund’s flexibility to roam across the credit spectrum has been beneficial in the long-term.

He says: “This is not a strategic fund, but it can have as little as 50% in high yield, with around 30% in investment grade and the remainder in sovereign debt and cash. At the end of the day, investors want high yield but this flexibility can help protect capital in a downturn and yet maintain enough high yield exposure to remain in the sector.”

The fund also has the tools to hedge out risk on a short-term basis.

Roane’s history is as a credit analyst and sound analysis of the fundamentals and financials of a company is key to the fund’s performance. However, he will start with an analysis of the bigger picture: “We also look at the broad drivers within the market to give us an idea of how we want to be positioned. For example we have recently reduced our position in peripheral Europe and reduced our consumer focus.”

At the moment, the fund is largely positioned in BB and B credits. It has a broad geographic spread, but the UK is its largest single weighting at 17.9%. The fund remains positioned to benefit from merger and acquisition activity. A recent success story was with Rhodia Chemicals, which was taken over by Solvay. Roane says that the group has a good ongoing dialogue with the investment banks.

In keeping with his cautious view on the situation in Europe, Roane has kept his exposure to peripheral European credits low. He adds: “We made the decision in April to go a bit more defensive. We have allowed cash to build up in the fund and have used credit derivatives to protect positions.” He believes there will be opportunities to re-enter the market later in the year when valuations look better.

He has also kept the retail exposure in the fund low, having cut it earlier in the year. Last year saw a lot of new issuance in the retail sector, in which Roane has only lightly participated. He points to companies such as Matalan or DFS, which are likely to be at the forefront of waning consumer spending and are also contending with higher input prices.

Despite his cautious stance, over the longer term Roane is still positive on high yield. He says: “There are a number of reasons why we believe the asset class is well supported. Companies are in fantastic shape. A number of companies in 2007 and 2008 had too much leverage and not enough liquidity. They have taken positive steps to deleverage and build cash on their balance sheets and many have been very successful.

“The broader economy may be mixed or weak but companies are in a very good position. They have tended to be very cautious on the sort of activity that is good for equity-holders but generally bad for bond holders such as M&A activity. Credit ratings and cashflow is a lot stronger than pre-crisis and has not deteriorated.”

Of course, the key aspect for many investors is the income. There are very few asset classes in which investors can generate an income return of nearly 8%. Roane says flows are still coming into the asset class on the back of the higher income available and therefore while interest rates remain low, the market should be able to retain investor support over the long term.