As
interest
rates
remain
elevated
corporate
bond
fund
managers
are
confident
that
one
sector
will
give
them
healthy
returns: Europe’s
banking
sector.
The
global
economy
continues
to
grapple
with
sticky
inflation,
yet
while
high
prices
have
squeezed
profit
margins
for
some,
interest
rate
hikes
have
led
banks
to
make
huge
profits
for
the
first
time
in
decades.
For
Konstantin
Leidman,
fixed
income
portfolio
manager
at
Wellington
Management,
the
quality
of
a
financial
company’s
assets
is
key.
In
Europe
the
story
has
been
a
positive
one.
“Europe
went
through
two
major
crises,
the
Global
Financial
Crisis
in
2009
and
the
European
Sovereign
crisis
in
2011.
Since
then,
the
banking
system
has
been
regulated
in
a
very
safe
way
in
terms
of
quality
assets,”
he
tells
Morningstar.
In
the
Wellington
Global
High
Yield
Bond
Fund
(GBP
N
ACH)
financials
makes
up
11.3%
of
the
fund’s
sector
distribution,
just
below
the
benchmark,
ICE
BofA
Global
HY
Constrained
hedged
GBP.
The
fund
has
a
Morningstar
Medalist
Rating
of
Silver.
“The
growth
of
European
financials
before
the
sovereign
crisis
in
Europe
was
quite
strong,
high
yield
before
the
global
financial
crisis
was
growing
in
double
digits
for
several
years
in
percentage
terms.
And
we
have
just
not
seen
any
growth
recently.
So
that
again
is
a
thing
that
makes
me
rather
comfortable
in
the
space.”
He
is
also
drawn
to
the
sector
because
it
deals
with
a
lower
level
of
competition,
unlike
for
example,
US
and
European
carmakers.
As
of
February
2024,
Leidman
held
Banco
de
Credito
Social
Cooperativo (BCC),
an
issuer
of
the
Spanish
bank,
which
makes
up
0.43%
of
the
fund
and
yields
5.25%.
Last
year
Morningstar’s
DBRS
elevated
the
credit
rating
of
BCC
to
BBB
to
reflect
what
it
says
has
been
a
positive
evolution
in
the
capital
of
the
business
and
the
progressive
reduction
in
risky
assets.
Trimming
Banking
Bond
Exposure
Yet,
Thomas
Hanson,
head
of
European
high
yield
at
Aegon,
believes
that
the
opportunity
set
by
banking
may
be
less
attractive
than
it
was
last
year,
with
the
sector
allocation
in
the
fund
being
trimmed
slightly.
“You
should
never
think
that
a
fund
should
permanently
dwell
in
any
part
of
the
credit
universe
be
it
a
ratings
allocation
or
a
sector.
We
are
looking
to
allocate
to
the
best
compensated
opportunities
at
any
point
in
time
and
banking
was
certainly
that
for
us
last
year.”
But
Hanson
still
backs
European
banks,
especially
after
Credit
Suisse
was
taken
over
by
UBS in
March
2023.
“There
was
a
lot
of
opportunity
to
add
risk
in
good
quality
structured
bonds
with
high
back
ends
[a
steepening
yield
curve].
We
thought
they
offered
exceptional
value
and
in
fact
we
have
been
the
most
overweight
in
banks
over
the
past
six
to
twelve
months
we
have
ever
been
in
the
fund.”
In
the
Aegon
High
Yield
Global
Bond
Fund,
which
has
a
Gold
Rating,
banking
is
the
second
largest
sector
allocation
at
16.5%.
(The
benchmark
is
the ICE
BofA
Global
High
Yield
Constrained
USD
Hedged,
which
has
a
4.4%
exposure.) The
Italian
bank,
UniCredit,
is
also
one
of
the
fund’s
top
issuers,
representing
1.61%
of
the
fund
and
yielding
7.3%.
However,
Hanson
has
also
dialled
back
some
of
his
exposure
to
bonds
in
leisure
and
consumer
cyclicals,
although
they
will
still
feature
as
part
of
the
fund.
“The
whole
thesis
there
was
to
do
with
the
fact
that
we
gave
the
consumer
a
bit
more
credit.
We
thought
they
were
a
bit
stronger
than
the
broader
market
was
giving
them
credit
for.
We
were
right
in
doing
that.”
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