The Luxembourg-domiciled fund will primarily invest in high-yield, sub-investment grade European corporate bonds with no more than five years to maturity and an effective duration that is roughly half that of the broader European high yield market.
The strategy’s aim is to provide positive yields from credit spreads, while reducing exposure to capital losses from any rise in underlying interest rates.
The fund will rely on a bottom-up security selection process to actively manage default risk whilst seeking to deliver strong risk-adjusted returns.
It aims to generate an annualised return of 75 to 100 basis points over and above returns of the BofA Merrill Lynch Euro Developed Markets High Yield ex-Financials one to three-year benchmark.
Defence against duration risk
Massimo Greco, head of European funds at JP Morgan AM, said: “With European government bond yields still near record lows, traditional bond investors are getting no buffer from interest rates due to coupons. With coupon protection non-existent, it makes sense to build some defence against duration risk into portfolios as the European Central Bank gradually recalibrates and yields potentially drift higher in Europe.
“High yield offers a degree of relative protection against rising interest rates and a source of income exceeding what investors could achieve in cash.”
The fund will also be run by lead portfolio manager Peter Aspbury, who has more than 20 years of credit experience. “Historically low default rates and a gradual corporate earnings recovery are likely to persist with the improving European economic backdrop.
“Although European high yield credit spreads still remain attractive in the context of these fundamentals, it’s perfectly reasonable for investors to worry about the impact of rising rates on their fixed income portfolios.
“We therefore think that a carefully constructed portfolio of shorter dated European high yield bonds could be an attractive proposition for many investors seeking both positive income and capital preservation,” he said.
