As COVID-19 has spread globally, credit markets have experienced severe spread widening in March. While this led to painful short-term losses for High Yield investors, great times may be ahead of those that are able to tap into the market dislocations that currently present itself. Nordea Asset Management has a longstanding partnership with the Global Fixed Income Team at MacKay Shields LLC for the management of its credit oriented strategies, including US High Yield. We would like to share with you here below the latest insights of the investment team and how they are planning to grasp the attractive opportunities that have emerged.
 

Over the past couple of years, we have been concerned by important imbalances building in the economy. These imbalances suggested to us that the economic expansion which began in 2009 had reached a late stage and was susceptible to shocks. Given this late-cycle assessment and valuations that were generally full, we have continued to gradually reduce risk during the last two years. As a result, high yield portfolios were defensively positioned entering 2020.

The COVID-19 health crisis is the shock which has transitioned the economy to the contraction phase of the cycle as government-mandated policies have put the economy into a recession. Both the monetary and fiscal authorities in the US have responded aggressively to stabilize capital markets and cushion the blow to individuals and businesses resulting from this crisis. Although we recognize that the depth of the current economic contraction as well as the timing and the trajectory of the subsequent recovery remain uncertain, we have started to incrementally add higher quality risk back into our high yield portfolios.

A number of factors have contributed to this decision, but the key drivers originate as always from our top-down and bottom-up framework. From a top-down perspective, in addition to the broad and aggressive response from monetary and fiscal authorities during the past several weeks, the US Federal Reserve announced on April 9th that it would provide direct support to the US high yield market for the first time ever by extending its credit facilities to recent and future fallen angels while also purchasing high yield ETFs. In terms of the bottom-up, valuations for higher quality issuers that should be able to navigate the current environment well have become attractive. Importantly, while valuations in the broader market have reached levels typically associated with a recession or significant dislocation, we do not believe compensation is sufficient yet in many higher risk credits and industries.

As we continue to slowly add risk back into portfolios, our initial focus is on higher quality issuers, including fallen angels that have the benefit of support from the Federal Reserve, where there is attractive compensation for risk. We believe a disciplined approach is especially critical in this unique environment, and therefore we plan to execute within the following framework:

1. Take advantage of opportunistic situations related to forced selling or significant new issue concessions
2. Purchase issuers we previously sold or reduced when valuations became too rich
3. Add high quality credits we did not own due to valuations
4. Move down in the capital structure of issuers we currently own
5. Add selectively to single-B and below credits

Importantly, the ability to add risk back into portfolios at turns in the cycle is a key component of the philosophy and process that has allowed us to successfully navigate multiple market cycles. While we are currently seeking to take advantage of attractive valuations and participate in the upside of the market, we continue as always to remain mindful of providing downside protection.

Fund

ISIN

Nordea 1 – US High Yield Bond FundLU0278531610 (BP-USD) / LU0378611387 (BI-USD)
Nordea 1 – Global High Yield Bond FundLU0476539324 (BP-USD) / LU0476539084 (BI-USD)
Nordea 1 – Low Duration US High Yield Bond FundLU0602537069 (BP-USD) / LU0602536509 (BI-USD)
Nordea 1 – US Corporate Bond FundLU0458979746 (BP-USD) / LU0475887237 (BI-USD)
Nordea 1 – Unconstrained Bond Fund – USD HedgedLU0975281527 (BP-USD) / LU0975281360 (BI-USD)