Europe Offers High Yield Opportunities

Five billion dollars has flowed out of the the high yield bond market in just one week - but while the US market is overcrowded, Europe provides plenty of opportunities

Emma Wall 6 August, 2014 | 7:30AM


Emma Wall: Hello and welcome to the Morningstar series, 'Why Should I Invest with You?' I'm Emma Wall and here with me today is Mike Della Vedova, manager of the T. Rowe Price European High Yield Bond Fund. Hello, Mike.

So there's been some negative press around the high-yield bond space at the moment and last week according to Merrill Lynch the entire sector saw outflows of $5 billion in just a seven-day period. That’s following on from Janet Yellen sort of talking down the asset class. Should we be concerned?

Mike Della Vedova: I think what's more interesting is where the outflow is coming from, and it was primarily the U.S. We saw significant outflows in the U.S. affecting U.S. funds and global funds.

What really this means is that investors have to think about maybe casting a wider net, no longer looking at Europe as simply kind of global asset class, but an asset class in its own right.

Wall: So European high yield bonds are looking more focused at that sector. What are the things going on there at the moment what are both the concerns and the positives?

Della Vedova: We've actually seen significant change in the European high yield asset class in the past few years. The market has grown significantly; it's over €400 billion in size and to put that in context that equates to over 40% the size of the U.S. high-yield market which is one of the reasons people should look at it in its own right.

Wall: And there's actually been quite a few issuances this year hasn’t there, more issuances in the six months of this year than the entire of last year.

Della Vedova: Precisely, and I think that really presents a very interesting opportunity right now for investors. It’s not just the amount the volume coming through, but it's the type of companies coming through. Thirty percent of the current market were not issuers back in 2010. So there is a lot of new companies, a lot of new opportunities, lot of new interesting ideas coming to market and utilising European high-yield market that have never done it before. I think that’s really why the stage is set for investors to consider the market cast that wider net and really look for those opportunities right now.

Wall: Let's break it down as to exactly why those companies are coming through, because high-yield is a little riskier than corporate bonds and in turn that’s a little riskier than gilts. Europe is perhaps a region that is slightly more troubled with the macroeconomic background than in the U.S. and the U.K. So these companies that are coming through are they a risky investment or is it simply that they've improved enough to be able to offer these bonds.

Della Vedova: Some of those reasons that you gave are exactly why those companies are coming to market. Banks have traditionally been the key source of corporate debt for a lot of companies in Europe. That tap's been turned off in recent times, simply because it's harder for banks to allocate capital to more risky or sub-investment grade corporates. So these companies where do they go, they’re going to public markets. They’re going to the European high yield market for example if they are sub-investment grade.

So that’s one of the key reasons, but we are seeing all sorts of companies. Sure there are companies that may not be good investments but there are lots of opportunities out there. Companies that investors haven’t seen before, companies with hundreds of years of track record behind them, companies in core – call them somewhat old fashioned type of industries, key industrial companies. Biggest parts of our sector right now are made up by the automotive, the building and telecommunications sector. It's a long way from 2000-2001 when it was nearly all dotcom and really pipedream type funding.

Wall: It is easy to be positive when you take a stance like that, what perhaps are you concerned about? These issuances, is there a case in the market that become flooded is that a concern?

Della Vedova: That is a concern. You have to be very selective, more selective than ever before right now in our market. There are good opportunities, but there are also risks and traps. You have to really work with management teams bringing these deals understand their businesses, understand their industries. If you can do that identify the risks, price those risks and really think about is this good value right now. Then you can capture value in those opportunities. If not, if you are willing to play every deal, and just simply chase the market, then all you are really doing potentially is buying those risks and not really pricing them correctly.

Wall: So it's about being vigilant now as a fund manager.

Della Vedova: More so than ever, and that’s the key thing. With so many new deals coming the market is being pushed like never before to look at more interesting, more diverse ideas. Now is the time to be selective. Now is the time to really do your homework, roll up the sleeves and work hard for investors.

Wall: Mike, thank you very much.

Della Vedova: I'm more than welcome.

Wall: This is Emma Wall from Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
T. Rowe Price European Hi Yld Bd A EUR17.90 EUR-0.09

About Author

Emma Wall  is former Senior International Editor for Morningstar

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