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