June 4, 2021

High Yield Fixed Income Investors Look Beyond Corporate Debt Funds

by Jack Fischer.

Lipper High Yield Funds (HY) led all general domestic taxable fixed income funds in 2020, taking in $46.5 billion in net inflows. The Lipper classification has been telling a different story this year. After seeing nearly $1.9 billion leave over the last two weeks, Lipper High Yield funds have logged the highest total net outflows under general domestic taxable fixed income funds over the following periods: year to date (-$13.4 billion), Q1 2021 (-$10.4 billion), and May (preliminary value: -$5.6 billion). For more weekly trends check out the recent U.S. Weekly FundFlows Insight Report.

A huge difference from 2020 has been high yield spreads. The ICE BofA High Yield Master II OAS uses an index of bonds that are below investment grade and calculates the spreads between the index and the spot Treasury yield curve. High yield credit spreads have been hovering at low levels not seen in years. The average high yield spread over 2021 has been 349 basis points (bps), where the 2020 average was 555 bps. The pandemic-era low was 321 bps back in early April and was the lowest high yield credit spread since October 2018. Historically speaking, that’s not a lot of compensation for the higher risk being taken on by investors.

The ICE BofA High Yield Master II OAS uses an index of bonds that are below investment grade and calculates the spreads between the index and the spot Treasury yield curve.

One Lipper classification that has seen some of the high yield market flows this year is Lipper Multi-Sector Income Funds (MSI). Funds within this classification also invest a significant portion of their assets in below investment-grade rated securities. One key difference from Lipper High Yield funds is the fixed income asset allocation is more diversified within the Lipper Multi-Sector Funds. MSI funds have the flexibility to invest into other assets such as asset-backed securities, mortgaged-backed securities, and bank loans. This provides portfolio managers the ability to apply credit research to seek yield beyond traditional corporate debt.

Lipper Multi-Sector Funds have attracted the largest inflows under general domestic taxable fixed income funds over the following periods: year to date (+$25.0 billion), Q1 2021 (+$9.8 billion), and May (preliminary value: +$4.1 billion). MSI has seen weekly net inflows for 30 straight weeks and 59 out of the last 60. As of May 27, Lipper Multi-Sector Funds have outperformed the general domestic taxable fixed income fund averages on a year-to-date, trailing one-year, trailing three-year, and trailing five-year basis.

Weekly Estimated Net Flows - High Yield Funds vs Multi-Sector Funds

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