Industry Voice: Where next for high yield?

Aegon AM’s Head of Europe High Yield considers the tactical and structural case for the asset class at a time when the ‘high’ part of ‘high yield’ is finally living up to its name.

clock • 4 min read
Industry Voice: Where next for high yield?

The opening months of 2023 have been something of a curate's egg for the global high yield market. January witnessed a truly monumental rally that surprised many with its ferocity, driven in no small part by the supportive technical environment. However, February's performance has been more circumspect as, among other things, rates markets have sold off and put pressure on total returns.

With the positive impulse from fund flows now diminishing (especially in US high yield), the market now finds itself in a slightly awkward spot. It is great to have that all-in starting yield of around 8.50% (even higher for one of our flagship funds), but you cannot deny that, when viewed through the lens of credit spreads alone, it is hard to make a bull case for further compression.

To put this into context, credit spreads were north of 650 basis points (bps) just a few months ago, before settling down to around 450 bps today (using the ICE BofA Global High Yield Constrained Index for reference). It depends on your assumption for average recoveries of course, but let's say that has gone from pricing in something close to a 6% default rate (which we would contend was undeniably cheap) to something nearer 3% (which we concede is perhaps nearer fair value).

So, where do we go from here? Well, the good news is with that high starting yield you still have an excellent platform to be able to deliver a positive total return from this point, just don't expect a sustained spread rally to add icing to that cake any time soon. Over the long term, global high yield has delivered some of the best risk-adjusted performance there is versus other asset classes, even relative to equities.

While the tactical case may not be as appealing as it was a few months ago, the structural case for high yield remains very much intact, as we illustrate on chart 1.

After all, as the saying goes, it is ‘time in the market' that counts more than ‘timing the market'.

And it is great to have the ‘high' part of high yield finally living up to its name.

Chart 1: 20-year asset-class risk vs. return profiles

Table, scatter chartDescription automatically generated

Source: Bloomberg, MSCI and S&P. Reflects annualized total return and standard deviation (volatility) over a 20-year period to 31 December 2022. Based on daily returns hedged to USD. Includes the following indices: Bloomberg Global High Yield TR for 'Global High Yield'; Bloomberg Global Aggregate TR for 'Global Aggregate'; Bloomberg Global Aggregate Corporates TR for 'Global Corporates'; Bloomberg Global Inflation Linked TR for 'Global Inflation Linked'; Bloomberg Global Treasury TR for 'Global Treasury'; MSCI World TR for 'Global Equities'; MSCI Emerging Markets Total Return USD for 'EM Equities'; MSCI Europe TR for 'European Equities'; MSCI USA TR for 'US Equities'; and S&P Developed REIT TR USD for 'Global Dev. REITS'.

A picture containing text, transportDescription automatically generated

 This post is funded by Aegon Asset Management

For Professional Clients only and not to be distributed to or relied upon by retail clients.

The principal risk of this service is the loss of capital. Please note that other risks will be present.

Opinions and/or example trades/securities represent our understanding of markets both current and historical and are used to promote Aegon Asset Management's investment management capabilities: they are not investment recommendations, research or advice. Sources used are deemed reliable by Aegon Asset Management at the time of writing. Please note that this marketing is not prepared in accordance with legal requirements designed to promote the independence of investment research, and is not subject to any prohibition on dealing by Aegon Asset Management or its employees ahead of its publication.

All data is sourced to Aegon Asset Management UK plc unless otherwise stated. The document is accurate at the time of writing but is subject to change without notice.

Data attributed to a third party ("3rd Party Data") is proprietary to that third party and/or other suppliers (the "Data Owner") and is used by Aegon Asset Management under licence.  3rd Party Data: (i) may not be copied or distributed; and (ii) is not warranted to be accurate, complete or timely.  None of the Data Owner, Aegon Asset Management or any other person connected to, or from whom Aegon Asset Management sources, 3rd Party Data is liable for any losses or liabilities arising from use of 3rd Party Data.

Aegon Asset Management UK plc is authorised and regulated by the Financial Conduct Authority.

AdTrax: 5251239.5. Exp Date: 31 March 2024.

 

More on Investment

Daniel Koller (pictured) is head portfolio manager at BB Biotech.

Daniel Koller: Three decades of biotech evolution

US still offering the most biotech names

Daniel Koller
clock 08 January 2024 • 4 min read
Stories of the Week: New Year Honours; Fundsmith slips down ii list; Another short position against Hargreaves Lansdown

Stories of the Week: New Year Honours; Fundsmith slips down ii list; Another short position against Hargreaves Lansdown

The biggest stories from the world of investment and asset management this week: New Year Honours; Fundsmith; Hargreaves Lansdown

Sarka Halas
clock 05 January 2024 • 1 min read
Partner Insight: Outlook 2024 from Royal London Asset Management

Partner Insight: Outlook 2024 from Royal London Asset Management

Royal London Asset Management
clock 03 January 2024 • 1 min read
Trustpilot