Man GLG's Scott: Recessionary Concerns May Be Premature

While the world readies itself for further downturn, Scott - who runs the Man GLG High Yield Opportunities strategy, comprising a Dublin-domiciled UCITS fund and UK-domiciled OEIC - believes recessionary concerns may be premature.  

Man GLG launches high yield fund for ex-Schroders manager Scott

"The market has got a bit ahead of itself with regard to all the doom and gloom," he said, explaining the "indiscriminate widening of spreads between the mid and lower echelons of the high-yield credit sector" are throwing up value opportunities. 

Against that dispersion, Scott has been taking advantage of the broader choice, finding the global services sector particularly promising, given its ability to withstand broader industry pressures, such as those plaguing manufacturing.

The services sector, which includes sub-sectors related to gaming and IT, is a rich source of alpha, he said.

"We tend to focus on cash-generative service businesses and non-cyclical sectors, such as gaming, which typically have quite strong free cashflow profiles and are able to generate healthy free cashflow even against a weak growth outlook, which we think is starting to unfold." 

The manager added: "We struggle to see a secular rise in defaults. Obviously, there will be idiosyncratic parts of the market that will witness defaults, but they will be where the business models are particularly challenged, such as we have seen with Thomas Cook and some of the commodity issuers."

The Dublin and the UK-domiciled funds, run as a mirror strategy, were launched in January and June respectively.

Since then, Scott has pared back his European exposure in favour of some selected UK names. Currency exposure at 31 July was split 46.5% euro, 28.61% sterling and 24.89% US dollar. 

The portfolio manager foresees two rate cuts by the Federal Reserve before the end of the year but questions how effective monetary policy is against a backdrop of full employment.

"I think the next shift in markets will be more fiscally led, rather than from monetary policy."

Scott's more cautious stance is further expressed through avoiding the more cyclical areas of the market, and he sees significant headwinds facing basic industrial and the automotive sectors.

Financials have, largely, been enjoying a multi-year improvement of their credit quality through higher minimum capital requirements and cleaner, lower-risk balance sheets since the financial crisis, but Scott adds "I think we are quite close to the end of that trend".

While he has found value in "a handful" of opportunities in UK, Spain, and Italy-based banking names, he says it is particularly hard to take a broad-brush view of the financial sector.

Man GLG's Scott on the outlook for credit

At the end of July according to FE, the €130m UCITS fund had returned 4.23% over six months versus 4.51% for the peer group, the Trustnet Offshore Fixed Interest Global High Yield. 

The fund, which carries an ongoing charge figure of 0.8%, was delivering a yield of 7.23% with an average duration of 2.3 years.

The portfolio has 51 long positions and 25 short positions.