Absalon Capital, a Danish investment boutique, started as an asset manager for global corporate bonds in 2015. Photo: Brzozowska Source: iStock

We harvest the high spreads from quality companies

Author: Klaus Blaabjerg and Toke Katborg Hjortshøj

Absalon Capital, a Danish investment boutique, started as an asset manager for global corporate bonds in 2015. In the same year, they launched two UCITS funds with the help of Universal-Investment – the Absalon Global High Yield and the Absalon EM Corporate Debt. In March 2018, the funds passed the three years track record and were both awarded with five stars ratings by Morningstar – getting the team back to the same level of success from where they had started 13 years earlier with former employer Sparinvest. Speaking with ChampionsNews, Klaus Blaabjerg, who’s managing the high yield funds with Peter Dabros, and Toke Katborg Hjortshøj, responsible for emerging markets with his colleague Sune Jensen, explain how the team builds on inefficiencies and overreaction in the credit markets.

Klaus Blaabjerg, Chief Portfolio Manager, Absalon Capital Photo: Sebastian Reimold Source: Universal-Investment

ChampionsNews: Your funds have achieved a stable outperformance in the last few years, they have been awarded with five stars by Morningstar, and you nearly doubled your assets under management from 100 to 200 million Euro. Congratulations, your clients must be happy!

Blaabjerg: We definitely hope so. We are quite satisfied with that, and the growth of our assets shows that our clients seem to be happy, too. We have also been able to raise money in our Danish funds. If we are looking at the combined assets under management, we are just above 400 million Euro – 200 in Denmark and 200 in the Luxembourg UCITS.

ChampionsNews: Is there a difference between Danish and German investors?

Blaabjerg: German investors are more institutional compared to the Danish client base, which is more a mix of retail and institutional investors. This is because our sponsor Formuepleje, the biggest independent wealth manager in Denmark, has many retail clients. So, that’s more of a natural retail pipeline compared to Germany where we use Universal-Investment to open doors for us. Our German investors are more a mix of private wealth managers, banks, fund-of-funds and money from industrial company’s treasury. But we are not purely focused on Germany – the funds are also distributed in Austria, Switzerland and in other locations, such as South Africa, Norway and Italy.

We still look for under-valued-bonds with higher spreads.

Klaus Blaabjerg ,
Managing Director Universal-Investment

ChampionsNews: Let’s talk about your investment process in general. Have there been any modifications within the process since the launch of the funds?

Blaabjerg: The core of the process has not changed, we still have a fundamental approach with a strong valuation component. We look for under-valued-bonds with higher spreads compared to leverage. But we have made two modifications. The first one is a risk model which is basically a two-layer-model, where one part is valuation which builds on the senior loan officer-survey and makes a prediction on how many defaults we will have in the next 12 months. The other part is momentum which is sort of a temperature on the market sentiment. Those two models combined provide us a traffic light signal: If they are both green lights that indicates that we should be above market beta on the overall portfolio. If it’s yellow, we are around the market level in terms of beta. And red signals that default is on the rise, the market is negative, and we should be more on defence.

Katborg Hjortshøj: We increased the focus on reducing large drawdowns. So, when you buy undervalued credits sometimes it comes with a higher volatility because it needs some time before you can harvest those excess premiums. By putting this model on top of the portfolio construction we have a better way of taking defensive measures a little bit earlier than we would have done in the past.

Toke Katborg Hjortshøj, Portfolio Manager, Absalon Capital Photo: Sebastian Reimold Source: Universal-Investment

Katborg Hjortshøj: We increased the focus on reducing large drawdowns. So, when you buy undervalued credits sometimes it comes with a higher volatility because it needs some time before you can harvest those excess premiums. By putting this model on top of the portfolio construction we have a better way of taking defensive measures a little bit earlier than we would have done in the past.

ChampionsNews: What’s the second modification?

Katborg Hjortshøj: The second modification is an ESG (environmental, social and governmental)-screening of the portfolio which is for both funds. The screen doesn’t prohibit investment in companies which have a yellow light, for example. But it does provide us a much deeper insight in potential tail risks relating to environmental or social issues. That improves our ability to manage the overall risk on the portfolio on a single company level. And as we have frequent meetings with management in most of our companies, this provides for a timelier screening process for those proper issues.

ChampionsNews: Does the ESG-screening exclude specific countries?

Blaabjerg: There is no exclusion list on the countries but, of course, there are restrictions on companies producing clustering-bombs for example. And there is an ESG committee in our company that may raise questions to us if they think that companies that we have invested in are having a behaviour that is not looking good.

Our ESG screening gives us deeper insight in potential tail risks.

Toke Katborg Hjortshøj

ChampionsNews: Where do you find attractive spreads for your high yield products at the moment?

Blaabjerg: We are overweight in Europe and slightly overweight in Emerging Markets, so from a global perspective to the index we are most overweight in Europe.

We also have an overweight in investment grade debt products. It’s because of our sector allocation. We have increased our weighting to insurance companies during 2018 and found a lot of interesting cases from a valuation point of view – some of these are investment grade. When we look at expected returns of these bonds to what we see as fair value, the return potential is much greater than in many high yield bonds, for example in US healthcare. We also still hold some longer dated 30-year corporate bonds which have investment grade ratings and where the curves are relatively steep. This way, we can harvest the high spreads from quality companies. We acknowledge we do take some duration risks but we can hedge the rate component of that with futures, so we only take the credit risk on those companies and still find that attractive in certain cases.

ChampionsNews: Is there a threshold for the investment grade products?

Blaabjerg: We can go up to 30 per cent but we have never been that high. We do look more at credit quality and return potential than we do at ratings, so we are not that conscious of ratings. If a company is rated with BB+ or BBB, the distinction between high yield and investment grade is not super important to us from a fundamental standpoint.

Less liquidity can work against you – but it can also work for you.

Klaus Blaabjerg

ChampionsNews: Looking back over the years, have you noticed any changes in liquidity in high yield or emerging markets?

Blaabjerg: If we look at the liquidity, surely, we have seen less willingness among the banks to provide liquidity. That’s producing more volatility, also on the individual credit level because once you have a selling flow in a certain bond the buyer is not there to the same extend as before. It does create more liquidity risk on the market. But on the flipside there’s opportunity for funds like us because we can capture quality papers which can drop a lot when others need to sell. So, it can work against you, but it can also work for you, because at times you can get quality papers for really attractive prices.

Katborg Hjortshøj: On the emerging markets side the liquidity on the bonds has not been that bad. Some of the reasons for that is that the emerging markets countries have become more mature and more active. Once the emerging markets hard currency fixed income bonds are mispriced, you normally see that some of the bigger countries and their pension funds etc. are being active in that market. This definitely means that there are greater active buying and selling days than you had when we started looking into emerging markets ten years ago. The financial conditions of the banks have changed but on the positive note you also have a greater base of active portfolio managers within these days. 

Author: Klaus Blaabjerg and Toke Katborg Hjortshøj
Date of issue: 1/28/2019