Lipper’s Jake Moeller examines changes to the composition of the IMA Sterling Corporate Bond High Yield sector.
REUTERS/Yuriko Nakao
April 2014 saw €4.1bn net inflows into bonds funds in Europe as interest in the asset class continues. The highest average debtor quality within the IMA Sterling High Yield sector is to B-rated securities (36%). This is followed by BB-rated securities (33%). Interestingly, these positions have been relatively stable; 12 months ago average exposure to B- and BB-rated securities was 33% and 32%, respectively. This represents only a small average increase to riskier B exposure. Looking at combined C-rated exposure (C+CC+CCC), there has been no change over the year (constant at 8%).
Five years ago average exposure to combined C-rated securities was 5%. Therefore, it is difficult in aggregate to say that high-yield bond funds contain higher credit risk today than they did five years ago. Certainly, average yields in the sector have dropped (4.6% for May 2014, 5.2% for May 2013, and 8.6% for May 2009), but rather than slavishly taking on more risk, it is likely many fund managers in the high-yield sector have merely become more discerning in their stock selection as the beta play in bonds has petered out. A 5% average increase in the sector to unrated securities (now at 10%) is likely a more expansive use of risk budget in what is now a very low default-rate environment.
Examining the market in aggregate overlooks the dispersion of credit exposures within the high-yield sector. Investors need to look very closely at which credit bucket is dominant in their investment. There have been some marked shifts in credit exposures over the past 12 months, and the sector is far from homogenous. AXA Pan European High Yield Bond Fund has significantly increased its exposure to B-rated securities during 2014 and currently has 55% of its exposure there—19 percentage points above the sector average. Similarly, Aberdeen High Yield Bond Fund has over 65% of its exposure to B—one of the highest exposures in the entire IMA sector. On the other hand, some funds in the high-yield sector are quite happy to fish in the BBB investment-grade pool. Ignis High Income Bond Fund and Invesco Perpetual High Yield are two examples of funds that have credit allocations in the lower-risk space.
Table 1. Changes in AXA Pan European High Yield Bond Fund Risk Return over 1, 3 & 5 Years
Source: Lipper for Investment Management/ Eric Ho
Correlations between credit exposures and performance are difficult to verify, and much more rides on assessing the quality and pedigree of fund managers and their ability to stock pick. Looking at the one-year performance of the sector (to the end of May 2014), top-quartile Marlborough High Yield Fixed Interest Fund, which has returned 9%, has over 50% of its portfolio in B-rated debt. Another top performer—Schroder Monthly High Income—which has returned 10%, has done so with 36% in B-rated debt.
