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A Tight Ship of Publicly Issued Short Durations

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Stockholm (HedgeNordic) – With so-called real yields, which reflect the corrosive effects of inflation, hitting lower and lower levels, the riskier corners of the global fixed-income market have become the go-to place despite lower starting yields than before. The Nordic high-yield market, which consists of a higher portion of floating rate notes than peer markets in the United States and Europe, is one corner well placed to navigate an inflationary and rising rate environment.

By running a Nordic-focused high-yield strategy with a very short duration, Norwegian Sissener Corporate Bond Fund appears even better positioned for the current inflationary and rising rate environment. “Given the high degree of floating rate notes in the Nordic high-yield market and our fund in particular, both this market and our fund should suit anyone looking for yield from sustainable businesses that operate in politically stable and economically strong economies,” argues portfolio manager Philippe Sissener. “With the prospect of higher interest rates, the high share of floating rate notes will really benefit investors looking to at least protect themselves against inflation.”

“Given the high degree of floating rate notes in the Nordic high-yield market and our fund in particular, both this market and our fund should suit anyone looking for yield from sustainable businesses that operate in politically stable and economically strong economies.”

Sissener and co-portfolio manager Mikael Gjerding are looking to populate their portfolio with high-yield bonds that offer spreads of around 500 basis points, hopefully enough to counter the wealth-erroding effects of inflation. “Even if the current environment of negative real yields persists with interest rates not following inflation, our credit spreads are making up for that difference,” says Sissener. “Our fund suits investors looking for capital preservation, inflation protection, and looking to protect themselves from higher interest rates thanks to the very short duration of the fund.”

“Our fund suits investors looking for capital preservation, inflation protection, and looking to protect themselves from higher interest rates thanks to the very short duration of the fund.”

The team running the fund has used its NOK 2 billion in assets under management to build a concentrated high-yield bond portfolio with a duration of only 0.4 years and an yield-to-maturity of 5.4 percent. The 0.4 duration means that a 100 basis points increase in interest rates would result in the value of its bond portfolio declining by only about 0.4 percent. “We hand-pick our credits,” Sissener explains the fund’s short duration. “When we can choose between fixed rates and floating rates in the current environment, we would choose the floating-rate note,” he continues. “We also have the opportunity to do interest rate swaps if we see that the duration becomes too long.”

Focusing on Public Issuers

Sissener Corporate Bond Fund sets itself apart from traditional high-yield funds in the Nordics by focusing on publicly-listed issuers. There is a long list of reasons to invest in high-yield bond issues of public companies, according to the Sissener team. “One of the main reasons is that historically we have observed much lower default rates among publicly-listed companies compared to their private peers,” starts Philippe Sissener. “Additionally, the recovery rates in case of default are also higher for the publicly-listed companies and that is purely on the metrics side.” There are also advantages on the information side, with higher transparency, better reporting and availability of management at public companies.

“Historically we have observed much lower default rates among publicly-listed companies compared to their private peers.”

“On the information side, it is a lot easier to follow the publicly-listed companies. Both external analysts and the media give much more attention to public companies than private ones,” says Sissener. “Any piece of news or anything to do with their competition is flashed in front of your screens within minutes after an announcement or press release,” he continues. “And when public companies get into trouble, there is much more pressure on them rather than private companies that may just turn off their phones and and not reply to anything.”

“On the information side, it is a lot easier to follow the publicly-listed companies. Both external analysts and the media give much more attention to public companies than private ones.”

Worst case scenario, in case of bankruptcy, the restructuring process can be easier for publicly-listed companies. “It is a lot easier for public companies to convert bankrupted bonds into equity in some sort of restructuring deal or raise equity for a recapitalization process, because there is a liquid instrument available already,” explains Sissener. Mikael Gjerding, who co-manages Sissener Corporate Bond Fund, goes on to emphasize that publicly-listed issuers are also associated with greater price discovery.

“We find the price discovery in this segment to be much better because you have a continuous pricing of the business and its assets through the listing on the equity market,” argues Gjerding. “It is easier to have a more accurate assessment on the worth of assets in public markets compared to private markets where you are in a black box for years,” he adds. “Although not essential, this price discovery is also important for our analysis process.”

“We have industry specialists on the equity side. It is a bonus to have that long track record of following the public companies from the equity side.”

By focusing on publicly-listed issuers, the team running Sissener Corporate Bond Fund also leverages on the experience and knowledge of Sissener’s entire team. Founded by Philippe’s father, Jan Petter Sissener, Sissener AS has been running a Nordic-focused long/short equity fund since 2009. “Members of our investment team, portfolio managers and analysts have most likely followed the publicly-listed companies in our universe for a number of years already,” explains Philippe Sissener. “We have industry specialists on the equity side. It is a bonus to have that long track record of following the public companies from the equity side, because some of them might be new to the bond market, but someone in house here has the knowledge of those companies and can help us reach faster and better conclusions.”

Concentration

According to Sissener, the traditional way of managing a high-yield bond fund involves spreading out capital and risk across 150 to 200 positions. “The traditional way means you are spreading your risk so much that each default does not hurt that much,” explains Sissener. “We want to keep a much tighter ship, a much more concentrated portfolio of 30 to 40 names. In that way, we aim to avoid defaults completely,” he continues. “This approach has worked so far and will continue to work as long as we are doing the proper work behind every name.”

“We want to keep a much tighter ship, a much more concentrated portfolio of 30 to 40 names. In that way, we aim to avoid defaults completely.”

The Nordic high-yield market has become more mature with a higher volume of outstanding bonds and more diversified issuer base. The marketplace has evolved from a predominantly Norwegian marketplace dominated by industries such as oil services and shipping to a well-diversified pan-Nordic market, and has recently transitioned into a market dominated by the Swedish real estate sector. “Even so, there is so much to choose from now that we can really optimize a well-diversified and really hand-pick a portfolio with names across various industries,” says Gjerding. “From 2015 and onwards, we have seen a bunch of real estate-linked bonds, yet our exposure is less than three percent compared to the market’s 25 percent.” Despite the domination of real estate, “there is so much more to choose from, so we managed to build a well-diversified portfolio.”

Sissener Corporate Bond Fund has generated an annualized return of 8.2 percent since launching in early 2019, and is on track to receive a five-star rating from Morningstar upon reaching its three-year anniversary in early 2022. “The main alpha is going to come from us avoiding bankruptcies and defaults,” argues Sissener. “Looking at this year in isolation, we are not at the top of the category because there have been zero defaults in the market, more or less, because of so much liquidity coming from the authorities in the whole world,” says the portfolio manager. “Even the most trashy stuff that in a normal market is not easy to refinance has been refinanced.” If and when market conditions get back to normal, Sissener Corporate Bond Fund wants its portfolio clear of any bankrupcies, thereby, achieving better performance than the more traditional, seemingly more diversified high-yield bond portfolios.

 

This article features in HedgeNordic’s 2021 “Alternative Fixed Income” publication.

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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