Fewer than 4% of managers across all Investment Association sectors have a track record that spans almost two decades running the same fund.
Robert Cook is one of them, having been in the management team of the JPM Global High Yield Bond fund since 2005. From his position, he has lived through a higher-interest-rates environment twice – between 2003 and 2008 and between 2021 and today.
Below, he shares how his asset class has changed, going from a niche and tactical play to a more strategic allocation and reveals how investors should be playing the current interest-rates uncertainty.
What is your process?
We take a 'pure approach' to US High Yield. Our research team develops insights into fundamentals and outlooks. Then the portfolio management team evaluates each security’s relative value, assessing compensation for different parts of the capital structure, covenants and liquidity.
We focus only on bottom-up fundamental credit views, without utilising off-benchmark asset classes like emerging markets and we do not deploy leverage or derivatives to implement a credit view.
Why should investors pick your fund?
Our goal is to generate strong, risk-adjusted returns in all market environments. Our track record demonstrates our ability to generate alpha in both high-return and low- or negative-return environments.
Are there differences between markets in the early 2000s and now?
Over the past 20 years, the US High Yield market has evolved significantly. First, the median size of companies today is around $600m in EBITDA [earnings before interest, taxes, depreciation and amortisation], which is three times larger than two decades ago. This increase in size generally comes with better market positions, more diversification, and stronger management teams.
The market now has a higher proportion of secured debt (approximately 35% versus less than 10% previously), offering better downside protection. Credit quality has also improved; for example, BB-rated market exposure has increased from 34% in December 2003 to approximately 52% as of July 2024.
Some riskier segments, such as smaller companies and private-equity-owned companies, have shifted to the private credit and leveraged loans market. Overall, the market has evolved to a higher-quality cohort while maintaining a strong return profile.
At $1.3trn today, we believe high yield has evolved from a niche, tactical asset class, to one that earns a strategic role in asset allocations.
What have you learnt from navigating the markets of the 2000s that gives you an edge today?
Historically, certain sectors have been aggressively funded, such as dark fibre and the internet, aggressive and prevalent leveraged buyout activity, and commodity booms and busts.
Today, we do not believe there are sector-specific excesses; for example, most exploration and production credits are leveraged at a ratio of 1-2x debt-to-EBITDA and are spending within cash flow.
Reflecting on the market in 2000, it provided valuable lessons about the importance of liquidity management, bond covenants, diversification, valuation discipline and regulatory awareness. These lessons remain a key focus for us in today’s markets.
Today, as in the 2000s, we place a strong emphasis on “loan to value,” ensuring we are adequately compensated for the debt load relative to the overall value of the business.
How should investors approach the current market?
Today’s environment offers attractive opportunities for carry [the income earned from the difference between the yield on an investment and the cost of financing that investment], with higher-than-average yields since the global financial crisis and a low default outlook.
Over the next six to 12 months, investors should expect varied results among sectors and issuers in our market. While our base case is for a ‘soft landing’, there are risks related to controlling inflation while still achieving economic growth.
What were the best calls of the past 12 months?
In the past year, our largest contributors were credits across different sectors that had experienced some stress, but that we viewed as having strong business profiles and offering attractive relative value.
In most cases, we participated in deals that extended the maturities of these credits with higher coupons and better collateral, allowing more time to execute on the respective business plans. These companies contributed approximately 60 basis points of alpha on a gross basis.
And the worst?
Our largest detractors were in retail, detracting by approximately 21 basis points of alpha on a gross basis over the past 12 months to the end of July. Retail is a challenged sector, as the US consumer has weakened, particularly at the lower economic end.
What do you do outside of fund management?
I enjoy playing golf, tennis, fitness and spending time with family.