Junk Bond Manager Beating 98% of Peers Bets on Stressed Debt

  • Value Partners high-yield China fund returned 4.9% this year
  • Premium on global junk notes has fallen to a three-year low

One of the world’s best-performing junk bond funds is dealing with the surging costs of debt globally by digging deeper in the bargain bin.

As the world’s riskiest notes soar to their most expensive levels in three years, Hong Kong-based Value Partners Group Ltd. is looking for value in securities others have avoided. Gordon Ip, who manages the $2.4 billion Value Partners Greater China High-Yield Income Fund, has overseen returns of 4.9 percent this year, beating 98 percent of peers targeting junk debt globally.

“Garbage also has value if you can price it right,” said Ip, head of fixed income at the firm. “If you can buy something for 5 cents and you think it’s worth 15 cents, then you’ve gotten it for one third of its value.”

U.S. President Donald Trump’s surprise election victory spurred a rally in risk assets from stocks to commodities, fueled by hopes that global growth will pick up. The average premium on high-yield securities globally has slid 349 basis points in the last year to a three-year low of 385, according to a Bloomberg Barclays index.

Ip said that the firm is looking at starting an alternative credit strategy fund to generate better risk-adjusted returns. The market rally has also prompted him to buy riskier, less well-covered names:

  • Ip’s fund’s second-largest holding was Development Bank of Mongolia LLC’s 5.75 percent bonds due 2017, as of Jan. 27. Ip said the fund bought the government-owned bank’s notes when they were trading in the low 90s; they were last at 102 cents.
  • “Although Development Bank of Mongolia’s credit has been in a dire situation, it has long been our belief that the issuer will be able to repay,” he said. “For a name like Development Bank of Mongolia, we are constantly having daily conversations with the multiple parties involved, sometimes a few times a day.”
  • The fund’s third-largest holding is Mongolian Mining Corp.’s 8.875 percent notes due 2017, which are in default. The securities have rallied to 61.8 cents from 17.5 cents a year ago.
  • Ip said he accumulated the notes “on the way down” and his cost is “way below” the current market price.
  • Treading into distressed territory brings risks. “When you’re in that territory, default is always a possibility,” said Ip.

At the end of January, 62 percent of his fund was invested in single B rated credits and below, compared with 55 percent and 50 percent in January 2015 and 2014 respectively. In his philosophy, there are no bad bonds, just bad prices.

“We just feel that you have to do something your competitor is not doing, in order to generate alpha,” said Ip, who has over two decades of experience in fixed income. “You’re doing things that fewer people do, take the road less traveled, and then take your punt.”

  • Ip has cut holdings of China property bonds from more than 50 percent to 46 percent, but is still “constructive” on the sector.
  • Expects the fund to post mid-to-high single digit returns this year.
  • Doesn’t like bonds issued by local government financing vehicles in China and said the yields offered by such securities mean it’s not worth the time to do the analysis.
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