Using the Lipper Leaders scoring system to analyse the best-performing funds in the IA Global High Yield Bond sector.

Global High Yield has been out of favour of late. Over 12 months to the end of February, UK investors have pulled £1.47bn from the sector. What’s perhaps surprising is that over the same period, they have put a similar amount into its euro equivalent. The IA’s dollar-denominated high-yield sector has seen redemptions of £2.17bn, while sterling high-yield has shed a more modest £466m.

But, then, sterling high yield is of a much more modest size: the global high yield market is $1.4 trillion in size, while the FTSE Russell High Yield index has a market value of about £38bn—only about a tenth of the size of the euro market.

Size matters, especially when the going gets tough: if your investable universe is small, there are fewer places to hide. And the going is going to get tougher.

The reason for this is that an increasing number of companies will be returning to high-yield markets to refinance over the coming years. Refinancing needs trend steeply upwards until 2029. The amount next year is more than three times that of this, and 2026 is about double that of 2025. Given how rates have risen since 2022, with inflation proving sticky, it’s reasonable to assume that companies refinancing will face significantly higher costs of capital than when they came to the market in the era of cheap money.

This may well prove to be a return to the creative destruction that many said would be necessary to clear out capitalism’s dead wood, but it will likely not be pretty.

While companies seem to be managing their refinancing needs, that wiggle room is not absolute: the higher the cost of capital, the higher the default rate. In the context of the UK market, the Bank of England’s Financial Stability Report noted: “Insolvencies are likely to rise further, as pressures from tighter financial conditions and the subdued economic outlook continue to feed through.”

This will be added to by any recession: while the global economy defied consensus last year by avoiding it, recessions fall into the same category as death and taxes. It seems unlikely that one will be avoided for the rest of the decade. Though—seeking that silver lining—recessions will have the effect of bringing down rates.

High-yield fund managers are, of course, mindful of this, and there seems to be migrating away from lower-quality, though higher yielding, credits towards those just below investment grade—BB and B.

One further point to note is that spreads—the difference in yield between high yield and ostensibly risk-free government bonds—are not great relative to history, meaning that the additional risk investors are taking on by moving down the credit spectrum are not being particularly well rewarded. But, given higher yields overall, this can be a good entry point, if you are comfortable with that risk.

In terms of overall performance relative to other high-yield sectors, global high-yield is up 5.37% over 12 months to the end of February, 11.42% over three years, and 20.02% over five. It’s a similar trend for USD high yield, while the euro equivalent has performed better short term—significantly worse over the longer (6.78%, 1.31% and 11.44% respectively)—with sterling showing a similar trend to euro.

The top-performing fund in the sector over three years is the PIMCO US Short Term High Yield Corporate Bond Index UCITS ETF USD Inc fund. Something of a mouthful but as the name suggests, it’s passively managed and short duration—meaning it will have been relatively less impacted by rising rates—though this won’t help is as rates fall. However, it has more than 83% in BB- or above-rated credit, and that may well.

Second-placed Barings Global High Yield Bond Tranche E USD Acc has more than 70% in BB and B credit, and a touch more than 8% in BBB-rated investment grade credit, and this too will likely act as a buffer against rising defaults. Both have Lipper Leaders Consistent Return five-year ratings of 5—the highest—and preservation ratings of 5 and 4, respectively. That ability to preserve capital may well come in handy over the coming period.

Table 1: Top-Performing Global High Yield Bond Funds Over Three Years (with a minimum five-year history)

All data as of February 29, 2024; Calculations in GBP

Source: LSEG Lipper

This article first appeared in the March edition of Moneyfacts (p17)