Managers shun high yield for fixed income value
Discretionary managers are on the hunt to find pockets of value in fixed income.
Discretionary managers are abandoning high-yield bonds as part of a range of shifts in fixed income allocation as they struggle to find value in the asset class.
With huge inflows into fixed income, especially high yield, in the past few years as investors searched for yield, discretionary managers have said that the high-yield market is looking expensive and have started selling out of the asset class.
Chris Bailey, head of direct investments at Close Brothers, said that high yield has had a “terrific run” but warned that poor-quality bonds had risen along with the better quality end of the market.
He said: “We are really unconvinced about the quality of that rally. If you do invest, you almost have to be like a stockpicker.”
Mr Bailey said that there was “just limited value in fixed income”, although he owned some index-linked bonds, both government and corporate, because he expected a rise in inflation, and that even his investment grade corporate bond exposure was very short duration.
Charles MacKinnon, chief investment officer at Thurleigh Investment Managers, said the firm’s most recent move on its discretionary portfolios was to “completely dispose” of all high yield holdings.
He said: “We’re not selling high yield. You can still get decent returns, but because we don’t think you will be able to generate excess capital gains from high yield going forward we would rather be in investment grade credit.”
Mr MacKinnon’s view that investors will only likely receive the coupon from high yield bonds going forward was echoed by Eric Louw, portfolio manager at Standard Life Wealth, although he said that he was still holding on to some high-yield bonds for the yield.
Instead, Standard Life Wealth’s asset allocation shift has been away from European and UK investment grade credit and into global real estate investment trusts (Reits).
Mr Louw said: “Buying Reits is a play on the search for yield, though Reits also have equity qualities but are not a pure play on equities.
“We have bought the Schroders Global Property Securities fund, which invests in the US and more defensive areas of Asia, which gives us more geographical diversity.”
Many discretionary managers are going through shifts in their fixed income allocation as so much of the asset class has become stretched, yet the need for diversification and defensive positioning continues.