Monthly Strategy Update: SiM US HIGH YIELD with ESG overlay
 

 

Good morning,

When you dare to look beyond corona, there are actually interesting opportunities:

The fund underperformed the BAML HY Index by 40 bps during the month of January with Sector Allocation and Issuer Selection detracting 27 and 2 bps, respectively, from the portfolio’s relative performance.  In Sector Allocation an overweight positioning in Energy detracted 25 bps from performance. 

The Coronavirus was a major surprise to the markets.  Its most notable near-term negative effects have been felt in the Energy and Shipping Industries, SiM’s two primary out-of-favor exposures where we hold significant over-weights vs. the Index and the Peers. The Coronavirus’s impact on the demand for these sectors has been sharp, however a V-shaped recovery in demand is expected.  We see 3 factors that will mitigate the oil demand destruction caused by the Coronavirus and support prices.    

First, the Chinese government has signaled an intent to provide strong stimulus to their economy once they’ve successfully contained the Coronavirus in order to offset the short-term impact.  A similar approach was taken 2003 and mostly negated the adverse impact on GDP of the SARS epidemic that year

The second factor mitigating demand destruction is the blockade of Libyan oil exports by Khalifa Haftar, Commander of the Libyan National Army, shutting down 1 million barrels per day of oil production since January 18th.  Currently, a near term resolution of the blockade is not evident.

Lastly, OPEC+ has signaled to the market that it will be extending its current production cuts, scheduled to expire at the end of March, out to the end of 2020.  The current cut equates to 800k bbls/d and the extension through year end, by itself, will potentially offset the demand destruction from Coronavirus.  In addition to the extension of existing cuts OPEC+ is also contemplating an additional 500k bbl/d cut for 2020 Q2 to further support oil prices in the wake of the Coronavirus.  The underlying supply/demand outlook has not changed for the oil market and we maintain our overweight positioning in this sector as a result

Within issuer selection Transportation & Telecommunications detracted 44 & 13 bps respectively.  Within transportation DHT hurt performance by 20 bps and Scorpio Tankers by 32 bps.  In 2019 both these credits had appreciated markedly and been major contributors to performance.  At year-end we had decided to trim our positions in both, and during January cut our holdings by 70% in DHT and 55% in Scorpio, most of that was accomplished in the first half of the month and captured a substantial portion of the gains from 2019.  Unfortunately, the Coronavirus in China cast a pall over the market.  In 2019 rates rose from a low of about $10,000 per day for both crude and product tankers to end the year at $104k per day and $38k per day, respectively.  Since year-end rates have fallen to around $23k for crude tankers and $16k for product tankers in early February and seem to have stabilized there.  DHT and Scorpio bonds are not distressed, they just fell from giddy heights.

Shippers of crude and petroleum products soared in 2019, and while their rates have been among the most affected by the coronavirus, the strong long-term fundamentals for tankers remain squarely in place:  major new refinery capacity in China this year will increase the import of crude and the export of refined product; Phase I of the US China trade agreement calls for large purchases by China of US crude, which will almost double the demand for shipping ton miles versus crude from the Middle East; the new fuels required by IMO 2020 will increase global refinery demand; and the supply of new ships is restrained.  Indeed, the underlying strength of the tanker market is evident in the fact that, despite China’s economy being locked down for a couple weeks, tanker spot rates are about the same as they were in early February 2019.  Most shippers petroleum as well as other shipping sectors had already locked in the majority of their 1Q20 charters before the virus hit, and that will provide a near term cushion as China deals with the crisis.   

As noted above, when China does get control of the coronavirus, the anticipated government stimulus is expected to largely offset the short-term impact to demand.  Although it is too soon to say that the coronavirus crisis is over, China is making progress in its fight and has tentatively begun to restart its factoriesIssuer selection within Energy and Consumer Goods contributed 30 and 20 bps respectively during the month


As a reminder: 

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.

 




Current characteristics of the fund vs the benchmark:

 

Fixed Income

Port

Bench

Mty (Yrs)

5.87

6.1

Eff Dur

2.8

2.96

Cpn

6.36

6.32

BB Comp

B+

B+

Cur Yld

6.55

6.25

YTM

7.8

5.91

YTW

7.07

5.13

OAS

562

325

OAS Duration

2.87

3

OAS Convexity

-0.52

-0.3

 

Data above is as of February 14th

Return and standard deviation 2011-2019 SiM vs Peers and Benchmark 

 

 

Strategic income Management US High Yield: 

As per Q4, 2019 the Strategic income Management (SiM) US High Yield strategy has an annualized outperformance of 1.4% over the BofAML US High Yield index, outperformin 98% of peers according to eVestment since inception in 2011. The strategy is a concentrated strategy, focused on long term investing. A core portfolio around long term secular trends is complemented with out of favor sector and small cap issuer allocations. The team successfully employed the same investment strategy for more than 20 years. SiM manages a US mutual fund of USD 1.43 bn with 4 Morningstars. SiM is an independent firm, employee owned and solely managing High Yield. For European investors, a daily liquid UCITS fund with ESG considerations is available with an AUM of USD 48 million: ISIN: IE00BF1XKQ87 There are USD shares and Euro hedged shares available.



Life is a rollercoaster and so have the US HY spreads been over the last 12 months


 

 

 

SiM's Default Rate compared to the benchmark is significantly lower, due to its stock selection.

 

 

 

 

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 peersSince 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 30-9-2019 is 104% Down market capture is 83%.

 

 








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

1.82

 

 

 

ISIN

IE00BF1XKR94

Beta

0.92

 

 

 

Benchmark

BofA ML US HY Master II

Std Dev

5.58

 

 

 

Currency

EUR

UMC

104.20

 

 

 

Bloomberg ticker

SIMHEIC:ID

DMC

82.97

 

 

 

Asset Class

Fixed Income

Information Ratio

0.81

 

 

 

Type

High Yield

Tracking Error

1.81

 

 

 

Region

United States

Sharpe Ratio

1.28

 

 

 

Dividend policy

Accumulating


Data as of 30-09-2019 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 3rd 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 83

 


 

 

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
- 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. 
- 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.

 

 

* 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."