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High yield continues to offer compelling alternative, says S&P

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Most fixed income fund managers remain bullish on high yield, believing it offers a compelling alternative to investment grade and equities from a risk-adjusted return standpoint, according to the latest sector review published by Standard & Poor’s Fund Services.


Most fixed income fund managers remain bullish on high yield, believing it offers a compelling alternative to investment grade and equities from a risk-adjusted return standpoint, according to the latest sector review published by Standard & Poor’s Fund Services.

“Against a backdrop of improving fundamentals and stable market technicals, and based on the strong assumption that a double-dip recession is avoided, most high yield managers expect the asset class to deliver an eight to 12 per cent total return over the next 12 months,” says S&P fund analyst, James Mashiter.

The high yield team at Aviva’s (S&P AA rated) Global High Yield Bond Fund offers a base case scenario of low growth/low inflation, which should be supportive of high yield, while the credit team at Western Asset Management, running the S&P A rated Legg Mason Western Asset US High Yield Fund, also sees a low-growth environment keeping interest rates anchored for some time.

However, despite the sanguine outlook, most managers have been reducing credit beta in recent months, generally preferring higher-quality names with stable cashflows. For example, co-managers Gibson Smith and Darrell Watters at Janus have been positioning their S&P A rated US High Yield Bond Fund more conservatively over the past six months, with a broad preference for BB credits.

Similarly, Anthony Robertson, who runs the S&P AAA rated BlueBay High Yield Bond Fund and its sister fund, the High Yield Corporate Bond Fund, favours high-quality names whose cashflow can withstand sustained economic pressures.

Over the past 12 months, high yield has outperformed investment grade, external emerging markets debt and Treasuries. However, returns in 2010 have moderated somewhat following the supercharged performance of 2009.

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