Over the past five years, the BNY Mellon Global Credit strategy has significantly outperformed its benchmark. Adam Whiteley, who manages the US$1.5 billion strategy which focuses on US investment grade credit, shared its secrets to success with Asian Private Banker.
“At a sector level, we currently favour utilities, which typically exhibit defensive characteristics in the event of a sub-trend economic environment,” Whiteley, head of global credit, explained. “They also currently generally appear cheap on a historical basis versus other corporate bonds when viewed through our valuation screens.
“We believe this is likely to be due to the large supply of bonds issued by utility companies as their networks need to be improved. For now, this is an area [where] we remain comfortable being overweight.
“Banks are also attractive as they appear to be cheap in valuation terms when compared to the broad industrial sectors,” he said. Whiteley’s fund invests in companies like Aon North America, Ventas Realty, JP Morgan, and Ryder System.
Quest for alpha
Whitely believes that despite tightened credit spreads, the economic backdrop remains supportive, with eurozone rate cuts materialising and anticipated elsewhere soon.
At least 55% of the fund is allocated to BBB-rated bonds and 30% to A-rated debt, compared to its benchmark, the Bloomberg Global Aggregate Credit TR USD Hedged, which allocates 40% to BBB-rated and 36% to A-rated.
Over five years of cumulative performance, the fund has returned 13.8%, while the benchmark returned 4.4%. In 2023, the fund returned 9.17% and the benchmark returned 8.68%.
Source: BNY Mellon
“In seeking to generate positive outperformance relative to the benchmark, we generally focus attention on achieving those gains through credit decisions, such as credit allocation, sector strategy, and issuer and security selection,” Whiteley explained.
“Taking directional views on markets, or including currency views within the portfolio, play a secondary role in our quest for alpha. Therefore, broad shifts in macro factors are more likely to influence positioning if we see them affecting the features underlying particular decisions,” he said.
The portfolio manager sees the likelihood of further interest rate cuts to continue supporting credit despite tight spreads. His credit selection process is based on economic growth prospects, central bank robustness, trade balance, and political stability.
“If we are satisfied that an issuer is viable, we will consider whether the potential likely forward-looking returns represent attractive value compared to peers, as well as in aggregate terms, for the risks taken.”
To mitigate currency risk, the fund, which has holdings in emerging market corporate and sovereign issues, avoids emerging market debt in local currencies. For non-USD assets, it typically hedges the risk back to USD to align with the benchmark.
What about defaults?
When asked about assessing credit quality and default risks of corporate bonds across sectors and regions, and adjusting allocations to optimise risk-adjusted returns, Whiteley said, “Where we see the potential for default as representing a reasonable threat, we will not invest, aiming to avoid the uncertain, and often volatile, consequences on the strategy’s returns.”
Source: BNY Mellon
“Reflecting that, the global credit strategy has not suffered from a default since it began in 2011,” he added. According to the S&P Global Default, Transition, and Recovery study, the number of defaults in the global corporate universe increased in 2023 compared to 2022.
Of the 153 global corporate defaults S&P Global recorded, Whiteley shared that two were below investment grade. In fact, the greatest preponderance of defaults was in the lowest high yield bracket, CCC/C.
“The two investment grade defaults were related to each other and rated in the BBB bracket at the start of the year,” he continued. “They were the first defaults holding an investment grade credit rating from S&P since 2019, and no issuer rated A or better has defaulted since 2009.”
“Between 1981 and 2023, the average annual default rate for investment grade issues has been approximately 0.2%,” the head of global credit concluded.
