Monthly Strategy Update: SiM US HIGH YIELD with ESG overlay

Links to the other Candoris Monthlies:
DSM US, Global, EME Growth         Coho ESG US LC        PAM Senior Loans        VanEck EME       VanEck EMD

 

Good morning *|FNAME|*,

In July the BofA ML US High Yield Master II index (EUR Hedged) returned 0.27% while the SiM US HY UCITS fund (with ESG overlay) returned 0.07%, underperforming the benchmark with 20bps (Net of fees and EUR Hedged). 

The Strategic income Management (SiM) US High Yield strategy has an annualized outperformance of 1.51% over the BofAML US High Yield index, ranking 2nd percentile since inception in 2011 (as of 30-6-2019).

Why US HY now: Correlations drop during down markets

*Down markets include: 8/31/2000-10/9/2002; 10/10/2007-03/07/2009; 7/20/2011-9/30/2011; 8/17/2015-2/10/2016 *Up markets include: 10/10/2002-10/10/2007; 37/2009-7/20/2011; 9/30/2011-8/17/2015; 2/10/2016-7/31/2018

HY investing: High Return/Low Risk
Please find the full presentation here






Meet the lead portfolio manager of the SiM US HY strategy:

 


September 23rd in Copenhagen


September 24th in Helsinki (morning)


September 24th in Stockholm (afternoon)
 

September 26th in Vienna

September 27th in the Netherlands

September 28th in the Netherlands

 

To set up a meeting with Gary if not done already: E-mail: florian.bankeman@candoris.nl

 

Current characteristics of the fund vs the benchmark:


Data above is as of August 8th

 

 

Portfolio commentary
The fund underperformed the BAML HY Index by 20 bps (Net of fees and EUR Hedged) during the month of July with Issuer Selection contributing a positive 6 bps and Sector Allocation detracting 13 bps.  Within Sector Allocation an overweight positioning in both Transportation and Healthcare positively contributed 11 & 11 bps respectively.  Our overweight allocation to transportation benefited from stronger shipping rates that tend to seasonally trend higher in the 2H of the calendar year.  Our overweight allocation in Healthcare benefited from our heavy exposure to Healthcare Facilities and Services as opposed to Pharmaceuticals, which was the worst performing sub-industry within Healthcare.  Our overweight positioning in Energy and more specifically Exploration & Production companies hurt us during the month detracting 22 bps from performance.  Despite oil inventories drawing dramatically globally during the month, indicating an undersupplied market, oil prices fell nonetheless on oil demand fears as the trade war between the US and China continues to ratchet up.

Issuer selection within Energy contributed 8 bps for the month as a result of all our Canadian Exploration and Production companies reporting excellent earnings vs. expectations.  Transportation was our largest detractor from issuer selection with a 12 bps impact during the month.  Within transportation Scorpio Tankers detracted 15 bps from issuer selection.  The bonds we own are convertibles and are particularly sensitive to the equity price, which suffered from the general risk off within equities of cyclically exposed industries during the month. Pioneer Energy Services detracted 8 bps from performance this month.  As mentioned last month Pioneer engaged Lazard Asset Management to advise on alternatives for improving their capital structure and competitive positioning.  One of the clearest options is a pre-packaged bankruptcy to restructure the debt.  We continue to hold the bonds and believe that their current prices represent excellent value.  This month they reported earnings above analyst expectations and gave down beat guidance given the lower level of activity being seen in the US Shale oil fields.  We, as part of a group representing a large majority of bond holders, are proactively reaching out to engage with Lazard to protect our interests.

Click
here for the replay of the latest SiM HY webinar.

High Yield Fund Flows
High Yield bond funds had monthly inflows of $3bln ($2.1bln from ETFs) in July, the second consecutive month of inflows. This brings the year to date inflows to $15.5bln ($10.2bln from ETFs).

Overview of the Market
The 2-Year and 10-Year Treasuries ended the month at yields of 1.92% and 2.02%, up 16 and 2 bps, respectively.  The ICE BofAML High Yield Index ended the month with an YtW of 6.00% and OAS of 393, down 4 bps and 13 bps, respectively. 

July performance rankings of asset classes were: S&P 500 1.44%, Emerging Market HY Corporates 1.02%, Leveraged Loans 0.84%, High Yield Bonds 0.51%, 3-5 Year Investment Grade 0.18%, and 5-year Treasuries -0.27.
In July, High Yield double-B rated bonds had the best return at 0.60%, single-B rated bonds at 0.58%, and CCC & below-rated rated bonds the worst at -0.07%. 

In the ICE BofAML High Yield Index the sectors with the best total returns were: Insurance 2.60%, Financial Services 1.87%, and Banking 1.51%.  The worst performing sectors were:  Energy -1.27%, Automotive -0.22%, and Utility 0.09%.

 

 

 

 

SiM's investment approach has proved to be effective for 2 decades. Before starting their own firm, the same team managed a US HY portfolio from 1998 till 2009 outperforming 96% of peers. Since inception in 2011 the SIM US HY strategy again outperforms 98% of all US HY peers in eVestment with this unique very different investment approach. Up market capture between March 1, 2011 and 30-6-2019 is 104.36 Down market capture is 82.97%.

 

 

Performance

 

SiM has proven to provide superior returns with similar risk compared to the benchmark and other strategies (track record since inception in 2011)



The Strategic income Management (SiM) US High Yield strategy is a concentrated strategy focused on long term investing. A core portfolio is complemented with out of favor sectors and small cap issuer allocations. The team has successfully employed the same strategy together for 19 years and manages a top performing USD 1.5 Billion US mutual fund. A daily liquid UCITS fund is available.

 

SiM Documentation

 

 

 








The investment philosophy is based on the premise that a core portfolio, built around long-term trends, and within the appropriate industries will outperform over a cycle and provide stability and downside protection. Additional alpha is added by investing in small cap bond issuers, out-of-favor industries, and non-traditional high-yield instruments. Focus is long-term with a low turnover.

 

 

SiM US High Yield Composite data                                               SiM US High Yield Fund Facts
 

Alpha

1.88

 

 

 

ISIN

IE00BF1XKR94

Beta

0.92

 

 

 

Benchmark

BofA ML US HY Master II

Std Dev

5.66

 

 

 

Currency

EUR

UMC

104.36

 

 

 

Bloomberg ticker

SIMHEIC:ID

DMC

82.97

 

 

 

Asset Class

Fixed Income

Information Ratio

0.83

 

 

 

Type

High Yield

Tracking Error

1.82

 

 

 

Region

United States

Sharpe Ratio

1.29

 

 

 

Dividend policy

Accumulating


Data as of 30-06-2019 source eVestment

 

About SiM
Strategic income Management (SiM) is fully dedicated to US High Yield investing. Their successful strategy has a core portfolio built around long-term trends that provides stability and downside protection. Over the full cycle the core portfolio outperforms, additional alpha is created by investing in out-of-favour sectors that are on a long term path of recovery; small cap bond issuers and non-traditional high-yield instruments. 

Since inception in 2011 the SIM US HY strategy ranks 2nd percentile. Before starting their own firm, the same team managed a US HY portfolio from 1998 till 2009.

 

SiM is unique versus peers, having an up market capture above 100 and a downmarket capture of 82

 


 

 

SiM provides higher returns vs peers, while having the same amount of risk of the Benchmark

 

 

SiM Unique Investment Approach

 

 

 

More about SIM
-SIM is based in Seattle and manages about USD 1.5 Billion in US High Yield. 
- It is an employee owned boutique, no staff turnover, full commitment and dedication
- SIM manages 1 strategy, so pure focus
- The team is together for 25 years. Initially at Principal investors/Edge and since 2011 at their own firm
- Excellent track record: During the 10 years at Principal the team scored top 4% out of all US High Yield managers. 
- The team is currently ranked 2nd since inception and 7th on a 5 year basis.
- Different approach to investing than most HY managers
- Commitment to Europe, recently launched UCITS fund, 2 yearly trips to Europe, long term partnership with Candoris.

 

 

Best regards,

 

 

 

* Performances are annualised. The latest data is still preliminary. Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate.. "This email is intended to be reviewed by only the intended recipient and may contain information that is privileged and/or confidential. If you are not the intended recipient, you are hereby notified that any review, use, dissemination, disclosure or copying of this email and its attachments, if any, is strictly prohibited. If you have received this email in error, please immediately notify the sender by return email and delete this email from your system."
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