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When credit analysis counts

24 July 2017

Fresh from winning FE's Best Fixed Income Alpha Manager 2017, Mike Della Vedova, of T. Rowe Price and a Horizon fund manager, discusses his approach to managing money

Mike and Jon - Alpha Manager

Mike Della Vedova, manager of the Zurich Horizon Monthly Income Plus (MIP) Fund and high yield portfolio manager at T. Rowe Price, recently won Financial Express’s award for Best Fixed Income Alpha Manager 2017. To celebrate his success, Zurich’s Jon Thompson, head of authorised funds, sat down with Mike to discuss bonds and his approach to managing MIP.

Jon: The objective of the Zurich Horizon Monthly Income Plus (MIP) Fund is to produce sustainable and smoothed monthly income while trying to preserve capital. How does your investment strategy achieve this goal?
Mike: The bonds we favour range from the lower end of the investment grade spectrum to the higher-quality end of the high yield spectrum. In this way we seek to provide attractive income while limiting credit risk by avoiding the most speculative high-yield issuers.

Jon: There are thousands of corporate bonds available for investors to buy around the globe. How do you filter down to the 50/60 bonds you hold in your portfolio?
Mike: We are lucky to have a wide global opportunity set. T. Rowe Price has a large international investment team that evaluates these opportunities for the various bond funds we manage, selecting investments according to our clients’ needs and specifications. Credit analysts in the high yield and investment grade teams deconstruct the set of bond issues and issuers in their scope, eliminating small issue sizes that are less liquid. They then undertake the detailed analysis that is the cornerstone of our investment decisions. The aim is to identify improving bond issuers, whose balance sheets are strengthening and creditworthiness is improving. This portfolio reflects the best ideas of our investment grade and high yield analysts and can be viewed as a high conviction portfolio of the corporate bond opportunity set.

Jon: There is much commentator noise about the end of the ‘bond bull run’. Given the objectives of MIP, how have you positioned the fund to ensure it is not adversely affected by this?
Mike: Bonds have enjoyed considerable gains since the global financial crisis, but so have most asset classes. There will always be a market for bonds: corporations will have to borrow money to run their businesses. Today, the biggest risks largely lie outside the market and are macro and geopolitical in nature (Trump, China and the Korean peninsula to name a few). European Central Bank policy (notably its bond buying programme) continues to support bonds, and growth in Europe, though low, is positive. We focus on fundamentals and identify issuers we believe in, taking advantage of short-term market volatility to buy bonds we favour at cheaper levels. Coupon is important. If investors buy bonds at yields high enough to compensate them adequately for the risks they run, that yield cushion can help buffer against volatility. This is an element that is often overlooked, and we think it will help deliver the returns for 2017.

Jon: T. Rowe Price has an outstanding record of avoiding bond defaults, what are the three key reasons behind this low rate compared to market?
Mike: Credit analysis, credit analysis and credit analysis. The basis of our investment approach is not just about identifying tomorrow’s high performers and improving issuers, but also avoiding the losers – the deteriorating businesses.

Jon: What was the last bond you bought for MIP and why?
Mike: We participated in a new issue from HCA, a leading provider of healthcare services made up of locally-managed facilities including hospitals and freestanding surgery centres in the US and UK. The company is currently one of the largest and most efficient operators in the hospital universe. Its strengths include solid earnings growth, limited capex/investment requirements relative to peers and best-in-class admission trends.

Jon: What was the last bond you sold out of MIP and why?
Mike: Earlier this year, we trimmed our exposure to BRF, one of the largest protein companies in the world. The company reported disappointing fourth-quarter 2016 results amid increased competition and supply challenges that put pressure on its international markets, particularly in the Middle East and Europe. In response to this changing dynamic, its efforts to protect market share led to significant price declines. The situation was exacerbated by recent Brazilian Real strength, which further benefited competitors.

Jon: When Zurich selected T. Rowe Price to run MIP we were impressed by the strength of the large global team supporting the product. Can you talk about your interactions on a daily basis?
Mike: We communicate both formally and informally. The whole high yield team meets twice weekly when all the portfolio managers, analysts and traders share their perspectives and debate analysts’ findings. For fast response to new events or bond new issues, we use email communication and credit insights posted to our internal platform, which are available to all investment professionals for real-time access. Investment grade meetings occur every morning alongside an in-depth weekly version, which is open to all. Collaboration and communication across our departments is constant and ongoing, and absolutely necessary to investing in today’s market.

Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. The specific securities identified and described do not represent all of the securities purchased or sold for fund. This information is not intended to be a recommendation to take any particular investment action and is subject to change. No assumption should be made that the securities identified and discussed were or will be profitable.