Investor Insight

Paul Reed, head of European High Yield at Aberdeen Asset Management has been the best performer in the IMA Sterling High Yield sector over the past year. Here, he tells What Investment.co.uk about his strategy for the Malborough High Yield Fixed Interest Fund.

Name: Paul Reed
Job title: Head of European High Yield, Aberdeen Asset Management 
Fund: Marlborough Fund Managers High Yield Fixed Interest Fund 
Sector: IMA Sterling High Yield Bond

A £1,000 investment in the Marlborough High Yield Fixed Interest Fund for a year until the end of February would have returned £1,733, according to Trustnet.

Q. You have gone from the worst performer in the sector (2008) to the best performer over the past year. How have you turned things around?
A. We had a rough time in 2008, we took a caning but we got it back in 2009 when the market decided it wasn’t the end of the world. Moody’s said that most of the high yield market was going to default. 2008 was a bit of a killer and the fund was down nearly 40 per cent but we are a buy and hold specialist – there is always an opportunity.

I have five analysts here covering the sectors, so we made the most of it. High yield should do what it says on the tin. Those that performed [well] in 2008 are now scrambling for new issues because they were too defensively placed. That’s fine when there are new issues from an existing company that you know well, but not when they are new names and you have to do considerable work on the analysis.

Q. Of those companies that defaulted, who stands out in your mind?
A. General Motors defaulted in the European market, as did Waterford Glass.

We also had a couple of smaller ones like French estate agents, Akerys Holdings that missed its coupon payment. Similarly, there was Countrywide, but that reconstructed. The bonds were swapped into some equity and some new bonds but we took a hit.

Q. What are the biggest underweights in the portfolio?
A. We don’t invest by sector because even in bad sectors you find good companies. Our biggest underweight is Autos and Auto Suppliers and we only have one holding in that area, Ford Bank (Europe).

Our other big underweight is Banks, but we have built that up a little bit. We have about 8 per cent in two or three stocks. Lloyds [Banking Group] we like. The reason we like the bonds is the yield and the fact that coupons have to be paid unless it gets equitised through solvency problems, which we think unlikely and a risk you are adequately rewarded for.

We have nothing in insurance and we are underweight in Media.

Q. And your overweight positions?
Our big overweights are Services and Gaming. Gaming is resistant to recessions. We have four or five in the gaming arena. Cirsa, a provider of slot machines to bingo halls and casinos in Spain and they have some substantial Latin American interests. They tried to buy their bonds back above par recently, but couldn’t get the deal done.

Recycling is our biggest single investment and we like a company called Eco Bat, Europe’s largest lead recycling company. We have known the company a hell of a long time. They bought into America as well. It is expensive to get into this business. They were a buyout from Shell originally. It is around 6 per cent of the fund although it has risen to that over time. That is a heavy holding, but we know the company and have known it for so long.

Read more from Paul Reed in April's print edition of What Investment, out in newsagents at the end of March.

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