Roy Keenan from Yarra Capital Management shares insights with James Dunn from The Inside Network on the role of active management. The Inside Adviser
After the Hayne Royal Commission many advisers decided to steer away from large dealer groups in favour of becoming self-licensed. In the last six months, however, that trend has taken an abrupt turn.
Don’t wait for a recession to get into ‘misunderstood’ distressed debt
Prospective investors in stressed and distressed debt are always holding out for a big blow up in the global economy to get into the asset class, according to Duncan Farley, portfolio manager for the RBC BlueBay’s event driven credit fund – but there are always opportunities for those with eyes to see them.
“I think a lot of people assume that in the distressed market you just need that big recession – that GFC or Covid moment – to happen,” Farley told The Inside Network’s Alternatives Symposium. “That’s not the case. There’s ample opportunity for managers like ourselves to find investments, and has been for the last 20-odd years.”
That’s particularly true in Europe, where Farley’s fund operates. With 27 countries to choose from, there’s a long list of “idiosyncratic situations that arise all the time”, and sector stress is or should be a key focus for any manager in the space, Farley said.
“The world might be going along perfectly fine but there’s always sectors that for whatever reason are struggling – think the energy and shipping space were particularly in trouble for a lot of the late ‘teens and created a lot of opportunity for investors like ourselves. There’s always something happening; you don’t need the world to end to be a debt investor in this space.”
But it does help. And Farley said there’s plenty of reasons to think that there are some troubles up ahead, including higher levels of leverage cropping up again – there are “too many companies out there that frankly have too much debt on them” – and a projected higher default rate that should create plenty of opportunities for investors.
“Particularly for the high cost of debt we’re seeing for corporates, we’re likely to be going into a multi-year cycle of higher defaults. It’s not going to be the GFC where it spiked up and you blinked and missed it; we’re talking about two to three years, possibly four years of high defaults.
Farley said that the asset class is “misunderstood”, and that it provides a sustainable mid-teens returns with a low correlation to other assets and the ability to get a daily price on the instruments, usually bank debt, corporate bonds or leveraged loans – bought at a discount, of course. But the key to what RBC BlueBay does is focussing on the downside.
“You’re inevitably going to get things wrong, so the most important thing to do when you’re starting off the analysis, is to work out what the worst case scenario is, and pay a price as close to that downside as you possible can – and that’s the work we do,” Farley said.
“We might not reject 99 out of 100 investments we look at, but we certainly reject the vast majority of what we look at because the price is too far away from the worst case scenario.”
