Liontrust Asset Management : Following sell-off, global high yield bonds look attractive on 6% yield

In a world of low default rates, the yield on high yield bonds is generally a good guide to future returns. That's certainly been the experience of the last ten years. Global high yield has not been immune to recent market turbulence and yields in excess of 6% are now readily available - without having to chase lower-quality investments.

The following table shows four previous instances where the US high yield market has moved, from a low base, through that magic 6% yield level. These four instances, in 2013, 2014, 2018 and 2020, produced annualised returns over the medium and long-term that average around 6%.

Source: Bloomberg, Liontrust, ICE Bank of America Merrill Lynch Global High Yield Index, as at 04.02.22

If you invested in October 2014, within a year you had bumped into the commodities driven sell-off of late 2015; investors in June 2013 met this after three years. Note that if you had excluded the very topical energy sector back in October 2014, you would have made a positive total return over one year. Investing on 12th March 2020, before we had appreciated the scale of Covid-19, you would have ridden the subsequent volatility and still had a pleasant investment experience. So even less-than-perfect conditions didn't hinder positive return

From this small sample, you can see the message we seek to deliver: high yield is a resilient asset class that typically, through its income engine, delivers the yield it promises on the day, and can often deliver periods of excellent total return over shorter periods. For investors to receive their high-yield income without suffering offsetting capital losses, we need to assume defaults will be low. Despite high and rising interest rates, we do believe that default rates will remain low.

Global growth remains in pretty good shape. Supply bottlenecks are slowly easing and, in general, consumers have savings to cushion the blow higher prices and interest rates might have on consumption. Importantly for borrowers, the vast majority of indebted companies have pushed debt out into the future; therefore, there is very little refinancing risk. Indeed, inflation - within reason - can actually reduce defaults, as high yield companies with existing, long-term fixed rate debt should earn more, enabling that debt to be serviced.

Our process favours higher quality businesses within the high yield market, meaning we have a low proportion of companies with the weakest credit ratings. If we are wrong on our positive outlook for global growth, we have limited investments in cyclical sectors. Sectors like those tend to feel the squeeze most during economic downturns.

The best thing about bond market drawdown is you get higher yields on the other side. It is too early to suggest we are through this current bout of volatility. However, in our view, it is not too early to suggest high yield valuations are attractive at 6% yield for longer-term investors.

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Key Risks

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

Investment in Funds managed by the Global Fixed Income team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Bond markets may be subject to reduced liquidity. The Funds may invest in emerging markets/soft currencies which may have the effect of increasing volatility. Some of the Funds may invest in derivatives. The use of derivatives may create leverage or gearing. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead.

Disclaimer

This information should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust. Always research your own investments and if you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.

Monday, February 7, 2022, 1:24 PM