US/EUROPE - High yield as an asset class is well established in the US where it can offer both depth and breadth - around 1200 issuers covering a wide range of sectors.
By contrast, Europe offers only around 100 or so issuers with more concentration of sectors, mainly telecoms, media and technology. The value of the US market is around US$350bn in the US, compared with around E20bn in Europe, though the figures vary according to the definition of high yield.
The European market has broadened over recent months, not because more issues have come on stream, but for other reasons. One is the advent of so called ‘fallen angels’ - companies whose debt has been downgraded from investment grade to junk status.
Another contributory factor is the disappearance of many TMT companies which have gone bust.
“The weight of telecoms, media and technology stocks has fallen from 50% at its peak to around 20%, so it’s more of a balanced market,” said Peter Harvey, fixed income fund manager at Foreign & Colonial.
Europe has suffered from a shortage of supply in recent months but activity picked up earlier this summer with several new issues announced.
“We have been getting a steady flow of new issues over the last few months, which has been welcome,” said John Lupton, director of European high yield at WestAM.
But several new issues were cancelled: “Gernsheimer has been cancelled through investor nervousness over current market conditions.
“The same thing happened with the Greif euro tranche,” added Lupton.
Others that did come to market were trading at below issue price within a few days.
In the US the high yield market has suffered high volatility during the first half of 2002, with the three main indices the CSFB High Yield Index, developed countries only, the Salomon Brothers High Yield Market Index and the Merrill Lynch High Yield Master II Index all showing wide dispersion and performance, according to research from Credit Suisse Asset Management. New issuance in the US totalled $47.5bn to end June, compared with $68.3bn over the same period last year.
*US investment manager Putnam Investments showed its confidence in the European high yield sector with its decision to buy London-based European high-yield manager New Flag Asset Management in July.
As well as managing its own institutional fund, the New Flag First Euro High Yield Fund, New Flag will provide research for Putnam’s high yield products. Both companies share the same investment philosophy using a bottom-up approach and credit intensive analysis.
Stephen Peacher, Putnam’s chief investment officer for high yield, said: “Our view is that even though returns have been poor it will turn around. Institutional demand for these markets is going to continue to grow. In the short or the intermediate terms demand from institutional investors and probably retail investors for high yield in Europe is not just going to be for European high yield but a mix of European high yield and US high yield.
“New Flag has found they need to have the ability to invest in the US market to provide the most diversified product. We bring that to them. What they bring to us is an outstanding track record and a clear focus on the European market.”
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