Trustnet Magazine 56 November 2019 | Page 50

In focus “Investors have learnt to rely on central bank intervention as being largely positive for all risk assets over the past decade” Looking outside of the UK, Hasler says that with a large chunk of European government debt now trading on negative yields, it is not surprising that sub-investment grade bond yields are low in absolute terms. US high yield is more attractive, however, while there are some interesting opportunities within emerging market high yield bonds. “The value of a bond is based on the “The latter is a result of the fact present value of the income payments companies domiciled in emerging (coupons),” Hasler adds. “Those markets often carry lower credit ratings companies that remain creditworthy than their fundamental quality would and able to keep paying their coupons suggest,” she says. “This is because throughout a recession often prove to they get marked down owing to be good longer-term investments for political and other risks associated with those who can hold through the dips. operating in an emerging economy.” “It is also worth noting that, on an income basis, while equities can and do offer attractive strategies, the income paid by bonds is more consistent and reliable and therefore of a different quality.” Getting late So where are we now? For Yearsley, the answer is simple: late cycle. “The economic boom has been ongoing for almost a decade; however, to prolong it, central banks in both developed and developing countries are cutting interest rates to stimulate economic growth,” he says. “If we don’t fall into a recession though, the extra yield on offer should mean that high yield continues to perform well.” TRUSTNET [ SECTOR PROFILE ] 50 / 51 PERFORMANCE OF FUNDS VS SECTOR Name 1yr (%) 3yr (%) 5yr (%) 10yr (%) Royal London Sterling Extra Yield Bond 5.29 25.42 40.88 173.13 Baillie Gifford Strategic Bond 9.35 19.05 30.78 117.58 Schroder High Yield Opportunities 2.96 13.97 32.95 81.92 IA Sterling High Yield 13.2 21.22 74.6 5.86 Source: FE Analytics When the music stops Chris Rush, senior investment analyst at IBOSS, is less convinced. The group currently has no direct exposure to high yield in any of its portfolios, noting that liquidity could quickly become a problem for investors. “While we have exposure to high yield through our corporate or strategic bond managers, it has been several years since we allocated directly to the IA Sterling High Yield sector,” says Rush. “Our primary concern is not they could fail to produce strong returns relative to other fixed income sectors, rather that high yield bonds can fail to produce strong returns in certain situations where markets move to being ‘risk off’ across all asset classes.” Rush argues that investors have learnt to rely on central bank intervention as being largely positive for all risk assets over the past decade. Consequently, he notes bonds and equities have traded on the same central bank-oriented news flow. “It is relatively easy to find funds that perform well in periods where central-bank intervention is ‘working’, but increasingly trustnet.com