Will High Yield bonds survive and do investors need to prepare for a leaner future?
CAMRADATA has published a new whitepaper, A Broad and Compelling Opportunity Set, which examines the investment possibilities in the High Yield universe, and shared views from investment managers and pension managers who attended a recent roundtable on High Yield investments. The guests were Allianz Global Investors, Eaton Vance, PIMCO, Mercer, Hymans Robertson, Redington and River and Mercantile.
In the whitepaper, CAMRADATA reports there have been very healthy returns so far in 2019 for pension fund and insurance investors from so-called risk assets, including High Yield, but says the chances of achieving the same level of returns going forward are slim and investors need to prepare for leaner years ahead.
The whitepaper examines the differences between the markets in 2016 and 2019, index awareness and benchmarking, “fallen angels” strategies, and the likely conditions that would push the whole universe down towards peril.
It also covers the market differences between Europe and the US and notes that Europe is more risk-averse than the US. It also considers the integration of ESG factors into High Yield.
Sean Thompson, Managing Director, CAMRADATA said, “In 2016 much of this sector’s bumper returns and low volatility derived from the largesse of Central Banks.
Today, the High Yield universe is as varied as it is large, yet bond yields have plummeted to an all-time low.
“Nevertheless, investors are still seeking those dizzy heights of the High Yield heydays, so key questions at this year’s High Yield roundtable were are the returns still out there, are they liquid enough to survive another ‘shock’ and how agile have they been these past years?”
Key takeaway points were:
- The most profound difference between 2016 and 2019 is that in 2016 yields were significantly higher.
- The best guide to returns from High Yield over the next five years is current issue price, which means 5.5-6%.
- The general mood of the roundtable guests is that investors are further down the line in terms of an extraordinary bull run, but argued that clever managers find pockets of opportunity whatever the conditions.
- In High Yield, one reason to avoid short-term comparison with the index is that it is hard to beat. Cynics might say this illustrates a dearth of skill among active managers but there is a more salient reason. Many influential issues are not liquid.
- The conditions investors fear could push the whole universe down are eruption of war in the Middle East and the knock-on effects on the energy sector, which is a key component of global growth.
- Another issue could be the rise of populism, whether labelled left-wing or right-wing, which could lead to competitive currency wars.
- Many companies that score well on ESG factors are not cheap. The challenge thus, as in so many aspects of active management, is to locate ahead of their market price, those enterprises that are improving.
Sean Thompson, Managing Director, CAMRADATA concluded, “High yield bond funds and the stock market make ‘influential friends’; guiding and encouraging the other, for better or for worse. High yield spreads are quite the indicator for investment analysts and economists alike; showcasing corporate economy outlook.
“With current economic uncertainty as a result of Brexit and US policy, our roundtable discussion highlighted it’s a particularly ‘reactive’ time for High Yield funds. Investors interested in this sector will value the insight shared at our roundtable and we’d encourage them to download this free resource.”
To read the High Yield whitepaper, click here.
For more information on CAMRADATA visit www.camradata.com