What is high yield investing?
A higher credit rating (above BBB or Bba for Standard & Poor’s and Moody’s, respectively) is considered ‘investment grade’ while a lower credit rating is considered ‘high yield’ (sometimes called ‘sub-investment grade’ or ‘junk bonds’). High yield bonds are typically more volatile with higher default risk among underlying issuers versus investment grade bonds. As with most investments, higher potential risks demand higher potential rewards to compensate, and as such issuers with lower credit ratings need to pay higher interest as incentive to purchase their bonds.
The high yield bond market was born in the US and that remains the largest and most liquid market. However, the asset class has now expanded globally offering potential benefits such as the diversification of Europe or the stronger growth potential of emerging markets.
Why invest in high yield bonds?
High yield bonds offer a number of potential benefits, alongside some specific risks such as higher volatility and higher default rates. For those in a position to take on higher levels of credit risk, high yield bonds may provide a significant yield enhancement to a well-diversified portfolio.
In addition to higher income than investment grade bonds, high yield often behaves differently to other areas of the fixed income universe so may provide important diversification to a broader fixed income portfolio.
Like equities, high yield bond prices can increase as a result of improved performance of the issuing company or a wider economic upturn. However, the typically higher income component of high yield bonds means that they are generally less volatile than equities.
High yield bonds are typically issued with shorter maturities than many investment grade bonds (generally less than 10 years) and, therefore, tend to have relatively lower duration. This means a high yield strategy may be less exposed to interest rate risk than most investment grade strategies.
Our experienced, dedicated high yield teams employ a consistent investment process which has been tested over a range of market cycles and conditions.
This process is centred on the philosophy that the key to superior long-term returns in the fixed income market is compounding current income and avoiding principal loss through fundamental credit analysis and macroeconomic research.
Our strategies all follow a robust bottom-up credit research process that focuses on identifying companies with improving credit trends, while the top-down component seeks to identify risks and opportunities associated with the overall economy and market. In this way we aim to minimise default risk and manage volatility through active management, while pursuing high yielding opportunities and potentially generating capital growth.
US Short Duration High Yield Strategy
Seeks to achieve primarily high attractive income and secondly capital growth by investing in US high yield debt securities over a medium-term period.
Europe Short Duration High Yield Strategy
Seeks to achieve primarily high attractive income and secondly capital growth by investing in European high yield debt securities over a medium-term period.
US High Yield Bonds Low Carbon Strategy
Seeks high income in USD from an actively managed bond portfolio whose carbon footprint is at least 30% lower than that of the ICE BofA US High Yield Index (Benchmark). The water intensity also aims at being at least 30% lower than the Benchmark.
No assurance can be given that our investment strategies will be successful. Investors can lose some or all of their capital invested. Our high yield strategies are subject to risks including, but not limited to: liquidity risk, credit risk, counterparty risk and the impact of any techniques such as derivatives. The use of such strategies may also involve leverage, which may increase the effect of market movements and may result in significant risk of losses.