The big call for global fixed income managers this year is not so much the continued search for yield or even the need for more credit, but how to benefit from the restructuring in the energy sector.
According to Mark Cernicky, Principal Global Investors managing director and head of global fixed income, the thing is this: about 18 per cent of companies in the high yield bond index are energy companies and many have suffered from the falling oil price; but the other 82 per cent of companies in the index will benefit.
Cernicky, on a trip to Australia last week, said: “Energy is THE call in 2015 and it’s about finding those distressed companies that shouldn’t be [viewed as distressed]… There are big differences in the energy companies. There’s a big difference between a midstream pipeline company and a producer. If you look at the companies which have reported recently, they’ve done a phenomenal job in de-leveraging. They’ve cut people and cut cap-ex expenditure.”
Cernicky believes that, generally, “beta’s done – it’s time for alpha. It’s a stock-picker’s, relative value alpha market.”
The stalwarts for many Australian investors – the big banks – are becoming “the new utilities”, he says. They are de-risking and becoming safer, but also less profitable.
Two other big themes for the Principal fixed income managers are banks, to a certain extent, and other de-leveraging stories. Cernicky says:
. Equity people don’t like banks at the moment but bond guys love them. It’s “a hybrids story” through the issuance of instruments such as contingent convertible bonds. “So, financials are a play over the longer term.”
. “We’re looking for great de-leveraging stories. We are seeing a lot more shareholder-friendly activity.” Related to this in the US is consolidation among cable companies, leading to more opportunities.
His advice to investors, is to diversify, which is an old theme. But he points out: “If you run a concentrated fixed income portfolio with a few banks and a couple of mining companies and rates go higher, you will lose money. It’s about protecting the portfolio from a drawdown.”
Principal’s view is that US rates will go higher about September this year, although the moves will be slower than they were last year. In fact, Europe represents a relative safe haven, at least for the next six months.
* Greg Bright is publisher of Investor Strategy News (Australia)