Around half of the discretionary investment managers used by UK advisers were overweight high yield bonds at the start of this year, a period when strong economic growth outlooks and still-low interest rates seemed to create the ideal conditions for the asset class.
Data compiled by FTAdviser’s sister publication Asset Allocator shows that 50 per cent of the UK model portfolio managers had an overweight position relative to the market, with 10 per cent having a neutral position, that is, a position of equal weighting to that of the wider market.
Those who had the overweight position have suffered, with the IA sterling high yield bond sector losing 6.6 per cent this year to date, a worse outcome than achieved by investors in the IA Strategic bond sector.
The issue may be that at the start of this year investors took the view that while inflation was rising, the outlook for economic growth was also positive, creating conditions which would typically lead to high yield performing well.
But fears around the outlook for economic growth have soured sentiment toward the asset class for many investors.
However, Donald Phillips, co-head of fixed income at Liontrust is a fan.
He said: “The investment case for high yield is that it’s an excellent long-term, income generating asset class. It has consistently produced equity-like returns, yet can be expected to have less than half the drawdown of equities.
“The outlook for high yield is generally favourable, in our view. There are plenty of resilient companies borrowing in this market, with pricing power, which is so important in an inflationary environment.
"A gross redemption yield above 7 per cent is currently available for a portfolio which largely avoids the lower quality and more cyclical areas of the market. There is a degree of interest rate sensitivity in high yield bonds (though you might argue less than large swathes of the equity market), but we note that, in our view, interest rates, particularly in the US, are getting closer to a peak.”
david.thorpe@ft.com
