We recently sat down with Mike Swan, portfolio manager at Arrow Capital, to discuss his fixed income and high yield outlook.
Inefficiencies caused by divergent central bank policies, currencies, and quantitative easing are providing worthwhile opportunities for investors seeking yield, in Canada, the U.S. and Europe. Mike Swan reveals some of what his firm has uncovered in their 'deep dive' research.
PIERRE DAILLIE: Hello and welcome to this instalment of AdvisorAnalyst Insighters. Today our guest is Mike Swan, Managing Director and Head of Credit Research at East Coast Fund Management.
Mike thank you for joining us today. Last week was a really interesting week. The FOMC met, during the meeting there was a change of wording, eliminating the word ‘patient’. The outcome of the FOMC meeting was basically that interest rates would be lower for longer; the credit market had a slightly weaker reaction, some short covering, spreads widened; there’s also been a disconnect from oil prices, from the high yield market …
MIKE SWAN: What we’ve seen recently in the credit market, there has been a little bit of the froth taken out, because of the decline in oil, and some of the high yield portion, but those bonds that aren’t tied to energy, really haven’t moved that much.
PIERRE DAILLIE: Sure, energy is 15% of the corporate bond market, …
MIKE SWAN: Yes, energy is 15% of the market, so spreads have widened slightly on energy, but not to the point that we think there’s tremendous value, but we do think there’s other parts of the market that have a lot more value now, than, say, 6 months ago.
PIERRE DAILLIE: There’s been a bit of a disconnect though, between oil prices, in terms of the negative correlation to the spreads …
MIKE SWAN: Yes, there certainly is, most bonds are pricing in $75 oil, over the long term, so right now in the situation we’re in, where oil is trading between $45 and $50, its really not being reflected in the price of oil bonds. We don’t have any oil bonds in the portfolio right now. It is something we would look to take advantage of if the bonds traded down, and we could buy them on a more distressed basis, but really what we’re looking for; our view is that oil prices will be lower for longer, we do think its going to shake out somewhere in the $50-$60 range, fo we’re not comfortable putting our capital at risk to buy something hoping that oil prices will come back to $75-$80.
PIERRE DAILLIE: What areas are you finding opportunities these days?
MIKE SWAN: We’re finding great opportunities now in a number of different areas; We have a large portion in European sub-debt, which with quantitative easing in the EU, those spreads are coming in nicely. We think they’re still undervalued, we think those credits still have room to improve, just from credit quality, and we think there’s good technicals in that part of the market.
In Canada, we finding good opportunities in the high yield sector and in convertible bonds; issuers who have large amounts of U.S. dollars in revenues, but not the same amount of costs, that way they’re growing their businesses, but they’re also getting higher margins, with the lower Canadian dollar. There’s a couple convertibles we’ve been adding to recently, we really like, because we think as credits, they’re great credits, and if the business has underlying momentum, and that they’re going to be much more competitive now with the dollar at 80 cents than they were with the dollar at par. We think we’re well paid, just sitting on a bond perspective, and we get the upside of the equities as well.
PIERRE DAILLIE: Interesting oppportunities, given the Canadian Central Bank’s stance on rates, I mean, in terms of the divergence from the Fed.
MIKE SWAN: Yes, and that’s one of the things we’re seeing in the markets; the divergence between central banks is providing us with a lot of opportunities.
And then the last area that we think is really attractive right now is Long-dated Double Bs (BB rating), high quality issuers we think are internally investment grade issuers, but they’re just rated as BB because of rating agency requirements, and we’re able to buy the long bond, hedge the interest rate risk and capture a great spread.
PIERRE DAILLIE: Mike, thank you very much for your time today.
Exemplar Growth and Income Fund seeks to provide investors with strategic asset allocation in equities and fixed income and high yield, and mitigate risk through various hedging techniques, including including cash, foreign exchange, interest rate swaps, and short positions.