Will riskier bonds start to outperform?
Back in April, we talked about corporate bonds being the opportunity of the century. Since then,...
Aviva Investors High Yield Bond
This fund predominantly invests mainly in UK and European bonds, but it can also invest further afield. The team pursues a total return rather than simply targeting the highest yield. A minimum of 80% of the portfolio must be invested in high yield bonds, while the remaining 20% can be allocated between investment grade bonds and cash. With a target of 80-100 holdings, diversification is a key attribute of the fund and holdings are not changed very often.
Our opinion
The Aviva Investors High Yield Bond fund speaks to the income-hungry investor. The fund has a low default rate, which is a testament to Chris’ stock picking skill and his focus on management teams that are incentivised to strengthen their companies’ balance sheets. Aviva’s risk management software adds to our confidence in the fund’s ability to access this higher-risk end of the bond market in a controlled fashion. We believe this is a core holding within a diversified, income-generating portfolio.
Company description
Founded in 1971 and wholly owned by insurer Aviva Plc, Aviva Investors is a global fund manager with offices in 15 countries across the UK, Europe, North America and Asia. It has a range of customers, from private investors to large corporate and institutional investors, and offers products within real estate, fixed income, equity, multi-asset and alternative investments.
Fund manager
Chris Higham has managed this fund since November 2012, having joined Aviva Investors in 2007. He started his investment career as a credit analyst with Morley Fund Management in 1999, after which he moved to Old Mutual Global Investors to work within fixed income fund management. Chris is a CFA charterholder and studied economics at Durham University. Sunita Kara became co-manager of the Aviva Investors High Yield Bond fund in June 2016. Sunita was previously a global high yield manager for Barings Asset Management.
The next decade will see significant growth in the high yield bond market. As opportunities increase, a healthy dose of scepticism will be required to achieve our objective of avoiding losers while generating income.
Chris HighamFund manager
Investment process
The process starts with two scorecards. In the first, the team looks at expected economic growth across various regions. In the second, it identifies the best sectors. The managers then look for bonds that they believe are underpriced by the market. They try to identify strong businesses that possess the ability to weather tough market conditions. They particularly like those companies with debt levels other managers deem ‘too high’ in which to invest, but which in their opinion demonstrate the ability to generate cash to pay down the debt - for instance through high profit margins on goods or services sold.
ESG
ESG - Integrated
The managers integrate ESG into the process as part of their investment approach. There are three different inputs to support this, with the process aiming to capture the financial materiality of both ESG risks and opportunities. The first input is the research published by their own ESG Corporate Research and Stewardship team. This is available from across the spectrum, from high-level sector coverage, to stock specific information. It provides a current ESG rating score as well as how this is changing. The latter of these is crucial to understanding the risk or opportunity that changing ESG factors may have on the portfolio. The next level is blended with the credit research. The scorecard system in the process incorporates an MSCI ESG score for a company and adds this into the analysis as part of an ESG-focused section. This score is displayed on the front page of the analysis. The final coverage point is from the portfolio management level, where the managers can assess the portfolio’s overall ESG risk from an aggregate of their holdings as well as what any specific biases may be.
Risk
Portfolio cash levels are fairly flexible, which offers Chris and Sunita the chance to sell or avoid investments during testing markets. Chris prefers to avoid losers rather than pick winners, which provides protection for the fund in volatile markets, as does the high level of diversification within the portfolio. The vast proportion of the fund is invested in high yield bonds, which do carry more risk of default than other bonds, although the extensive stock selection process ensures due diligence, making manager skill key to the fund performance.
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