Since 2005, Sparinvest’s pioneering value bonds strategy (for corporate bonds) has delivered a much lower default rate than the market average. The strategy is based on academic evidence that value and size are identifiable risk (and therefore alpha) factors within the credit premium*.
Our investment process uses fundamental analysis to select corporate bonds paying higher yields than are justified by the risk of investment. There are no currency plays or derivatives. Our Value Bonds strategy is:
- 100% bottom up
- Off benchmark
- Designed to exploit alpha factors
- Not reliant on official credit ratings
- Focused on bondholder protection for M&A upside
- Risk focused - including ESG
Benefits for investors:
- 100% bottom up investment process - means a thorough investigation of each bond invested in by a team specialising in both credit and security analysis and with a strict approach to indebtedness. This means investors get a well-diversified portfolio of bonds that have passed our rigorous quality control checks and which offer a high recovery rate.
- Off benchmark - active management is conviction-led and can lead to considerable divergence from benchmark. Whilst this alpha-focused strategy may deliver higher volatility than average, it is also likely to result in higher long-term returns for investors.
- Designed to exploit alpha factors - Our experience shows that the bonds of
value and small-cap companies, as well as companies headquartered in emerging markets, often pay higher yields than are justified by
the risk of investment. By exploiting this knowledge we are able to deliver high return bond investments at lower fundamental risk.
- Not reliant on official credit ratings - The companies in which we find alpha are often unfairly penalized by official credit ratings agencies on grounds unrelated to their ability to repay creditors. The fact that the majority of market players rely on official ratings creates value opportunities for us. By relying instead on our own in-depth research, we can target high yielding bonds from fundamentally strong but under-rated companies.
- Bondholder protection - we analyse all bond documentation to ensure that bondholders are as well protected as possible for the risk of providing credit. We favour companies with strong protective covenants in place to protect against SEO risk-taking and to offer ‘positive optionality’ (upside in bond prices) in the event of M&A activity.
- Risk focused - we focus on fundamental risk in all its potential forms, including default risk, liquidity risk and LBO/change of control risk. We believe that environmental, social and governance issues can impact on a company's ability to repay its debts and must therefore be considered alongside financial risk factors.
Sparinvest’s value bonds strategy covers the global universe of corporate credits, including emerging markets. Therefore the following strategic options are available:
Choice of Credit Rating:
- Investment Grade
- High Yield
- Whole ratings spectrum
Choice of Regional Exposure:
- Developed Markets
- Emerging Markets
Choice of maturity date: we can offer fixed-maturity solutions. Ask us for details.
This strategy is also available with optional ethical screening.
* In 2001 professors Elton, Gruber et al undertook a study of the spread between rates on corporate bonds vs. sovereigns. They concluded that a significant proportion of the credit premium could be explained as being a reward to investors for bearing the systemic risk of investment in smaller and undervalued companies.