Peripheral high yield bonds have rallied in recent months on the back of a pick-up in sentiment towards Europe; however Lake says investors who want exposure to that market have now missed their chance. The manager, who recently took over the Mirabaud Global High Yield Bond fund, says he is holding more cautious positions on the continent as he is expecting a great deal of volatility in Europe over the coming year.
"We are underweight cyclicals and the periphery in Europe, because I don’t think we have got to the bottom of the trough yet," he explained.
"There will be more concerns over the Italian elections, Spain has been out of the headlines recently but that hasn’t gone away, we still have elections in Cyprus – which are a small but important test – and there is still rioting in Greece."
"It is an entry point issue in peripheral Europe, because I feel there is still a lot of volatility to come," he added.
Lake says stretched valuations are particularly concerning, because they mean that prices are more likely to react to negative news.
"There have been a lot of inflows into the periphery such as Spanish bonds. However, we are underweight in the periphery on a value-driven basis," he said.
Performance of indices over 6 months
Source: FE Analytics
"There are a number of good-quality companies in the European high yield market – basically fallen angels."
"However, they are listed in sovereigns that are struggling so they don’t trade on their corporate fundamentals."
"These are companies such as Telefonica, which happens to be listed in Spain. The company fundamentals won’t be affected by a political upset in Spain, but its prices will react in relation to the sovereign’s situation."
"These sorts of companies were yielding around 7 per cent last year. They were the buy of the year in 2012, but spreads have compressed and now they are yielding at the levels they were before the crisis."
"The risk now is that you are no longer playing Beta, but the highly correlated relationship between the sovereign situation and company fundamentals," he added.
Lake previously ran Aviva High Yield Bond, from July 2010 to October 2012.
According to FE Analytics, over that time the fund returned 20.06 per cent while the IMA Sterling High Yield sector made 18.98 per cent.
Performance of fund vs sector during manager's tenure
Source: FE Analytics
He took over Mirabaud Global High Yield Bond in February 2013 when the fund was launched. It has made a solid start, returning 6.51 per cent since then.
Although Lake is avoiding risky holdings in Europe, he has a high weighting to cyclicals in the US, a region that he believes is a lot closer to a sustainable recovery.
"The fund is quite cautiously positioned at the moment," he said. "We like cyclicals in the US but we think it will take some time before we move into European cyclicals."
"In both Europe and the US, we like healthcare, general industrials and other meaningful products such as energy. In the US, the cyclicals we like are auto suppliers and homebuilders."
"However, you have to differentiate between the US and Europe as they are at different stages of recovery."
"Our next strategy may be to look at European cyclicals, but I don’t think we are there yet."
Lake says he primarily uses a top-down approach when investing.
"There is absolutely no point taking a bottom-up approach if you think that an economic meltdown is just around the corner," Lake said.
"You need to set the scene. I spend a lot of time speaking to our macro team which is based out in Geneva. We look at the sectors and see what is driving Beta correlations and then we will look at the bottom-up stock selection."
"It is important to have that integrated top-down view with a smaller amount of holdings, as it gives you more flexibility," he added.
Lake is concerned about the profitability of investment grade corporate and government bonds, but says he is expecting healthy returns from the high yield fixed income market this year.
"My point of view is that high yield won’t return as much as in 2012, which was a stellar year; however, with our forecast of a continued low-growth environment, I think 2013 will be a steady one," he said.
"I think the high yield market can still make a positive 6 to 7 per cent this year, which I know is a bit of a cop-out coupon rate, but in this environment that is the sort of thing we are expecting."
The fund has an ongoing charges figure (OCF) of 1.5 per cent.