UK advisers withdrew a total of £434.5mn from funds in the IA UK High Yield Bond sector in the first nine months of the year, a figure that equates to about £48mn a week, according to data from Morningstar.
During that period, the IA Global High Yield Bond sector has returned 5 per cent, compared with the IA Government Bond sector which has lost 2 per cent, while the IA Corporate Bond sector gained 2 per cent, as the chart below shows.
High yield bonds are those which have a credit rating below BBB.
On a five year basis, the IA High Yield Bond sector has returned 17 per cent, compared with a loss of just less than 10 per cent for the average government bond fund, according to data from Morningstar Direct.
Interest rates rising is usually expected to be a negative for high yield bonds as the coupon available on lower risk bonds such as government debt, rises, reducing the attractiveness of bonds with more credit risk, such as those in the high yield universe.
Shaniel Ramjee, co-head of multi-asset strategy at Pictet Asset Management, has generally been quite defensive when it comes to fixed income exposure, and is particularly worried about the spread - the extra yield offered on high yield bonds in compensation for taking extra credit risk - which is not particularly high.
But he said with economies perhaps performing better, “there are some areas” of high yield he finds attractive.
Bringing a couple of those points together is Thomas Hanson, high yield bond fund manager at Aegon Asset Management.
He said markets were worried about the consequences for many companies that issued high yield bonds in the era of low base rates, and would have to refinance as rates rose.
But he said that so far, those companies have been able to refinance by issuing new high yield bonds, without much problem.
He said lower base rates now mean high yield investors are willing to lend to riskier companies, while he expects the fall in the interest rate available on cash deposit will lead to an increase in clients seeking assets with a higher yield.
Ben Kumar, a strategist at 7IM who is keen on high yield bonds right now, said: “High Yield Bonds are a much larger part of our portfolios than many peers – you get a lot of industry diversification vs the equivalent indices (ie compare US HY to US Large Cap Equity), and most of the time, you’re well compensated in yield terms.
Tactically, we love to look at HY after sell offs in the equity market – if it’s blown out, it tends to overreact, and bounce back quicker. So in April 2020, post-Covid, we were buying High Yield bonds (and in fact IG bonds), rather than equity.
"The broad vanilla indices are pretty good as a starting point, but managers do offer something different.
"However, it’s important to find a manager who isn’t going to get carried away – and end up doing something they shouldn’t in an area they don’t understand. (Bit like Strat Bond funds)
