Global High Income Strategy

Hi, my name is Michael Connelly, I'm Samy Muaddi and we are Co-Portfolio managers of the T. Rowe Price Global High Income Strategy.

So I'm originally from Wisconsin, but I've been at T. Rowe for over 20 years.

I started out as an analyst in the US high yield and but split my time between London and Baltimore covering US high yield and European high yield.

So that really gave me a global perspective on investing in high yield bonds.

So I've spent my entire 20 year career in T. Rowe Price emerging market debt.

It would be disingenuous if I said that was the plan.

I was a first generation college grad and didn't know much about the industry, but T. Rowe took me in and developed me.

My primary interest was economic development and I quickly realised that emerging market debt sits at the intersection between capital markets and development.

So that's what attracted me into the industry and why I've stayed here this long.

I started here when I was hired as the first emerging market corporate analyst at T. Rowe, right?

And so we've been in that industry now over my career of 20 years.

But what was really important to me early on is being able to draw on lessons from your team because we've been doing high yield bond investing for over 40 years.

So a lot of those corporate balance sheet lessons in the developed world have really translated over my career into early lessons on the emerging market side.

But I would say we both at our heart our analysts and that's how we approach a lot of our investing is with an analyst hat on.

That's what we're we grew up doing, that's what we're known for and that's what makes us successful.

One is it's global focused.

If you look at the high yield bond market, it started off as primarily a US bond market, but over the last 20 plus years the US opportunity set is really only about half of your opportunity set and if you include bank loans in that, it's only about 1/3.

So if you are excluding about 2/3 of your opportunity set, you're leaving potential performance on the table.

So I think global high incomes, global opportunity set really sets it apart.

The second one is portfolio construction.

We focus on our highest conviction ideas and focus on credits that have a clear catalyst for our performance.

We've run a little bit more of a concentrated portfolio and letting those highest conviction ideas really drive performances is unique.

So I think what's important too is that global research platform in the pursuit of excess return gives us a lot of tools to work with.

So we don't have to rely on just carry or out yielding the benchmark as a source of excess return.

And because we're focused on the actual bottom up ideas rather than just putting more yield in the portfolio, it allows the strategy to be more resilient on the draw down.

I think that's an important distinguishing factor.

So I think a good example of where our process made a difference is, is right now with the chemical sector, it's undergoing a difficult fundamental period of time and which is usually when you want to buy some of those cyclical industries.

However, our analysts both in high yield and emerging markets identified that companies are seeing some really weak fundamentals.

We reached out to our equity energy analyst who was in the Middle East and talked about Middle East companies moving downstream, which means more chemical production capacity that's negative for the supply environment.

We also reached out to our sovereign analyst who covers China and he was talking about how they are building more capacity in chemicals ahead of 2029 environmental standards, which all of this paints a really negative supply market that formed our opinion on chemicals.

And we're, we're underweight under risk, but I think that's a good example of how we can pull together all these resources to create better outcomes for our clients.

And that collaboration with the sovereign team that you highlight, that's especially critical in emerging market debt because 25% to 30% of the companies that we invest in have some degree of state ownership.

I go back, one, you know, important Inflexion point in my industry was during the Russia Ukraine war.

And it was our sovereign analysts who actually foresaw the sanctions risk that could happen if the war were to arrive and keep us out of Russia, out of Ukraine, which really preserved capital in a very important time in 2022.

On behalf of Samy Muaddi and myself, we thank you for your interest in Global High Income.

Four questions about the T. Rowe Price Global High Income Fund
 

Why should investors consider an allocation to global high yield?

I think a high yield, the risk adjusted returns of high yield are phenomenal.

There's a sharp ratio, a statistic that looks at risk adjusted returns and then high yield has as an asset class is one of the highest sharp ratios out there.

Just the fact of compounding coupons and Albert Einstein has a great saying that compounding interest is the eighth wonder of the world, for those who understand it, benefit from it from those who don't understand it end up paying it.

So the power of compounding coupons is really what I think the appeal for the high yield asset classes.
 

How do we achieve outcomes for investors?

So global high income is a little bit different than most high yield products out there.

It has the widest opportunities set in all of high yield that you can invest in US high yield, European high yield, merge market corporates high yield, levered loans.

It has the opportunity set of around 5000 different issuers.

So what that opportunity set brings is the opportunity to find great bottom up ideas and we have all of the research analysts and resources in place to take advantage of those great opportunities and we package it into you know pretty thoughtfully constructed portfolio that focuses on highest conviction ideas and really what's our best ideas drive performance.
 

How do you select the high yield bonds from 3,500 in the universe?

We have 30 analysts feeding ideas into us on a daily basis. We meet every day, sometimes for up to two to three hours a day.

It's very time consuming, but it's really the most important thing we do as portfolio managers is listen to those bottom up ideas.

You know, all the ideas from the credit analyst team are pitched to all PMs for all strategies. And so I think you have the collective wisdom of the analysts and the PMs in that room really lead to better investment outcomes.

You can identify more opportunities, you can maybe avoid more pitfalls. You know, if there's somebody's an analyst is talking about a loan that might not necessarily be great for global high income, but I have experience in that industry or I've looked at that company before.

I can help inform, you know, the loan portfolio managers that this is great or you know, I'm not so sure about this. And so all those shared experiences and wisdom I think create good outcomes.
 

Can you share one global high yield takeaway for investors?

Fundamentals are really good in the high yield space from a leverage and coverage ratio basis. And really that has boiled down to a low default environment.

And so if you look at what generates returns in high yield, it's defaults, defaults are high, the asset class underperforms, defaults are low, the asset class outperforms.

And so we anticipate defaults will continue to be at a well below average level. That should lead to continued performance of high yield.