The upside down world of the credit markets

>The upside down world of the credit markets

Strange things are afoot in the critically important global credit markets. Lale Topcuoglu, Head of Credit at J O Hambro Capital Management, explores why a search for yield has created an insatiable demand for credit products that is leading to weaker investor safeguards and increased opaqueness by corporate debt issuers. What should investors be worried about and how can active management help in these curious times?

Investment Strategy

Investment approach

The JOHCM team employs a differentiated bottom-up approach to investing across asset classes that is rooted in global value investing and which seeks to balance current income with the preservation and growth of capital in real (inflation-adjusted) terms over time. They seek to identify income-generative investments where they believe a margin of safety exists between their sense of the security or underlying business’s intrinsic value and the valuation reflected by the security’s market price. In normal market environments, the income level is expected to range between 3.5% and 4.5% of AUM after expenses. However, the team prioritizes the preservation of capital ahead of income generation, thus actual income distribution may fall outside these ranges. 

The team invests across global equity and debt capital market and seeks to manage relatively diversified portfolios, typically investing in the securities of 80-100 debt or equity issuers.  The equity exposure can range from 30% to 70% of the fund, but will generally be at least 40% of assets under management.  

Capacity for the Global Income Builder strategy has been set at $10 billion, at which point JOHCM will take steps to limit additional inflows in order to protect the interests of existing investors.

Investment objective

The investment objective of the JOHCM Global Income Builder Fund is to seek a level of current income that is consistent with the preservation and long-term growth of capital in inflation-adjusted terms. 

The Fund seeks to achieve its investment objective by applying a bottom-up, long-term global value investing philosophy across a broad range of asset classes. In a bottom-up approach, companies and securities are researched and chosen individually. The Fund normally will invest in a wide range of income-producing equity securities, including common stocks of U.S. and foreign companies that offer attractive dividend yields. The Fund also normally will invest in a wide range of fixed income instruments from markets in the United States and multiple countries around the world such as high-yield instruments (commonly referred to as ‘‘junk bonds’’), investment grade instruments and sovereign debt. Additionally, the Fund normally will invest in hybrid securities that embody elements of both equity and fixed income securities such as preferred shares and convertible bonds. The Fund may invest in securities of any maturity or investment rating, as well as unrated securities. While the Fund may hold investments in non-income producing securities, under normal market conditions at least 80% of the Fund’s assets will be comprised of income producing securities.

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Podcast

  • The upside down world of the credit markets

    18 Oct 2019 | 19 mins

  • Lale Topcuoglu

    Senior Fund Manager & Head of Credit

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Disclaimer

This podcast is for professional investors only. The information contained within this podcast including any expression of opinion is for information purposes only and is given on the understanding that it is not a recommendation. Views as of date of recording, 18 October 2019, and are subject to change. Past performance is no guarantee of future performance. The value of investments and the income from them may go down as well as up and you may not get back your original investment.

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