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Stay Active and Handpick Your Credits

Report: Systematic Strategies

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Stockholm (HedgeNordic) – Launched in the first quarter of 2019, Sissener Corporate Bond Fund has navigated a series of sell-offs in the Nordic high-yield corporate bond market. The first test came in the roller-coaster year of 2020 when the COVID-19 pandemic triggered significant intra-year swings in credit spreads and returns. 2022 was a challenging year too, with multiple sell-offs driven by war in Ukraine, a European-wide energy crisis, and rapidly rising inflation and interest rates globally.

“It has only been four and a half years since we launched, but we have been through a stress test in terms of COVID, which was the craziest time we’ve seen since the global financial crisis, or even worse than the financial crisis during those two weeks of March,” says portfolio manager Philippe Sissener. “We have been through a pandemic, war, rising interest rates, recession fears, and also a banking crisis that is probably not over,” he elaborates. “We are very happy with how the fund has performed.”

“We have been through a pandemic, war, rising interest rates, recession fears, and also a banking crisis that is probably not over. We are very happy with how the fund has performed.”

Sissener Corporate Bond Fund, which employs a more conservative approach to investing in the Nordic high-yield bond market, has fared well in its first four and a half years since its inception. The fund managed by Philippe Sissener as lead portfolio manager gained 6.3 percent in its first year, 8.0 percent in 2020, 7.8 percent in 2021, a relatively solid 2.9 percent during the challenging year of 2022, and 8.0 percent in the first ten months of 2023. Despite solid performance, its portfolio still sports a yield-to-maturity of 9.2 percent.

“Our conservative approach to the high-yield market has been very helpful in uncertain and volatile times like we experienced during March 2020 or several times last year with the war breaking out, recession fears emerging, interest rates rising, and also the bank crisis in March this year,” says Sissener. One advantage of this conservative approach is that Sissener Corporate Bond Fund experiences smaller declines than the broader market during bouts of volatility and, more importantly, recovers much faster from drawdowns.

“Our conservative approach to the high-yield market has been very helpful in uncertain and volatile times like we experienced during March 2020 or several times last year…”

“The rebound is much faster because investors will always chase quality in times of uncertainty,” explains Sissener. A portfolio of more conservative and higher-quality high-yield bonds will decrease less in value and recover more rapidly. “These characteristics of our bond portfolio explain why the fund has been behaving as it has,” he elaborates. The preponderance of floating-rate notes in the Nordic high-yield market is another reason for the solid performance of Sissener Corporate Bond Fund in the rising interest rate environment of 2022 and 2023.

“We are not as vulnerable in a rising interest rate environment because we do not experience a significant present value impact on the bond prices, but we do benefit directly from higher interest rates through our coupons instead,” says Sissener. In late 2021, for instance, Sissener Corporate Bond Fund had a concentrated bond portfolio with a duration of only 0.4 years and a short time to maturity. “Low duration and shorter time-to-maturity helped us avoid a price beating last year and this year. This has made our returns much less volatile when spreads tighten or expand,” says Sissener. “With the high-yield markets down between 10 to 15 percent last year, we were actually up three, which is great results from both a relative and an absolute perspective.”

“Low duration and shorter time-to-maturity helped us avoid a price beating last year and this year.”

In a higher interest rate environment and with the – still distant – prospect of lower interest rates, the team running the fund has started to add some duration to the portfolio. “We began including some fixed-rate notes to the portfolio to extend the duration,” says Philippe Sissener. “Although we will never have a very long duration, as it would be hard to get duration to exceed two years.” The current duration of 1.1 is a “very comfortable place to be,” according to Sissener. “Even if rates fall, our portfolio will appreciate in terms of price. However, we will receive lower coupons, so the effect balances out.”

The Evolution of the Market and the Focus on Public Issuers

In recent years, the Nordic high-yield market has transformed from a predominantly Norwegian marketplace dominated by industries such as oil services and shipping to a well-diversified pan-Nordic market. “Back in 2005, a high portion of the market was dominated by project-risk companies, with more than 50 percent of the market related to the energy sector,” says Sissener. “The market has transformed quite a lot through the global financial crisis,” he continues. “Since 2015, we have seen a shift in the market towards a more diversified issuer base, offering a wider range of sectors to choose from, enabling us as investors to build a broad and diversified portfolio.”

Despite managing a much larger asset base than before, Sissener prefers to maintain a more concentrated portfolio in higher-quality issues. Sissener Corporate Bond Fund manages NOK 3.6 billion in assets as of the end of October, compared to NOK 2 billion in late 2021. The team also finds most of these high-quality issues among publicly-listed issuers. Sissener Corporate Bond Fund differentiates itself from traditional high-yield funds in the Nordics by focusing entirely on publicly listed issuers.

“First of all, we are seeing a lower default rate among the publicly-listed issuers compared to private companies,” Sissener explains. “We are also observing higher recovery rates from publicly-listed issuers in case of default due to their access to equity capital,” he elaborates. “Equity is much more available, and if worst comes to worst, we are always able to convert our bonds into a listed equity.”

“We are seeing a lower default rate among the publicly-listed issuers compared to private companies.”

Bonds issued by publicly listed companies also offer higher liquidity in the secondary market. “If you hold a bond issued by a publicly-listed company, you have a much larger pool of potential buyers of your bonds in the secondary market compared to private companies,” says Sissener. Typically, only the primary buyers follow the private companies in the secondary market, whereas publicly listed companies attract a broader audience. In addition, publicly listed issuers provide more transparency, better reporting, and easier access to management.

“The publicly listed companies report four times a year, with the media, external analysts, and equity analysts all being on top of these companies,” explains Sissener. In contrast, private companies often receive much less attention. Publicly-listed issuers exhibit lower default rates, higher recovery rates,  better and more available information, and higher liquidity in the secondary market if and when one wants to buy or sell bonds. “It’s a much better risk-reward to focus on this segment.”

Soft or Hard Landing, It Doesn’t Matter

Predicting the future of the economy has always been a challenging endeavor, with the ongoing debate surrounding whether the economy will experience a ‘hard’ or ‘soft’ landing continuing to dominate market attention. “We are always approaching bond investing from a conservative angle,” says Sissener, irrespective of the prevailing market conditions. “We believe that it’s very hard to say whether we will have a soft or a hard landing, but we definitely believe that the market will continue to be turbulent,” he emphasizes.

“We are always approaching bond investing from a conservative angle.”

In such an environment, “it is very important to stay active and handpick your credits and equities and without speculating about the nature of the landing.” Their bond portfolio is designed to withstand turbulence, remaining robust in either scenario. “We are prepared for the worst, and then we are happy to get a further upside if indeed there is a soft landing.”

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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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