Introduction
According to FE Analytics, the Investment Association (IA) Sterling High Yield sector comprises 32 funds from 26 providers.
For funds to qualify as high yield in this sector, they must invest at least 80 per cent in sterling-denominated fixed interest securities and at least 50 per cent of their assets in below BBB-minus fixed interest securities.
More than half of the funds in this sector have a 10-year track record, with five of those funds achieving top-quartile performance to May 5 2015, FE Analytics reveals. The Invesco Perpetual High Yield is the top performing fund over this period, delivering a 109 per cent return, compared to the sector average of 78.91 per cent. It is also the best performing fund over five years, having generated 53.20 per cent to May 5, against the sector’s 34.98 per cent average.
The Invesco Perpetual fund is also the least volatile fund in the sector in the year to last month end, followed by the Royal London Short Duration Global High Yield Bond fund and the Ignis High Income Bond fund. In contrast, the Baring High Yield Bond fund was the most volatile over the past 12 months.
In spite of some respectable returns from high-yield bond funds, net retail sales of this IA sector over the past year show several consecutive months of outflows, peaking at outflows of £209m in November 2014. However, the most recent figures for March 2015 show net retail sales of the Sterling High Yield sector picking up, with flows of £3.8m into the sector.
Overall, net retail sales of fixed income funds were down to £128m in March this year, from £130m in the previous month, the IA reveals.
Certainly, the diverging monetary policies of Japan, Europe, the UK and US could be one reason investors have not been inclined to put money into high-yield bond funds in the past year.
In his quarterly economic outlook, Invesco Perpetual’s chief economist John Greenwood points out this “marked divergence” in the monetary stances of central banks has “increased volatility in the currency, fixed income and equity markets during the first quarter of 2015, and will probably continue to do so through 2015”.
“The implications for financial markets are that yields on fixed income securities will continue to remain lower for longer,” he continues.
Chris Higham, manager of the Aviva Investors High Yield Bond fund, agrees that in the current environment growth and inflation will stay low.
He notes: “We continue to expect interest rates to stay very low and policymakers clearly are continuing to support markets. With the European and Japanese interventions, [2015] will be the largest year of quantitative easing since the start of the financial crisis, which is pretty staggering considering it’s seven years since the crisis.”
However, Mr Higham still has a positive outlook for high yield: “We think yield and asset prices will remain well supported and that the hunt for yield will continue. It’s a perfect backdrop for credit and, as a consequence, high-yield bonds will continue to be in high demand.”
THE PICKS
Baillie Gifford High Yield Bond
Robert Baltzer and Donald Phillips manage this £634.52m fund that launched in November 2001. According to its factsheet, the managers run “detailed bottom-up research… Our portfolio is well diversified, with exposure to between 50-90 companies typically.” The portfolio has clocked up several years of outperformance, as data from FE Analytics shows. Over 10 years to May 5 2015, the fund is the second best performing in the IA Sterling High Yield sector, with an impressive 107.35 per cent return, compared to the sector average of 78.91 per cent.
Schroder Monthly High Income
This offering launched in February 2000 and is run by Michael Scott and Schroders’ credit team. The £228.5m fund has 165 holdings and invests in higher yielding or non-investment-grade bonds. Fund performance has picked up in recent years, having dropped to fourth quartile in the five years to May 5 2015. Over three years the fund delivered 28.16 per cent, against the sector average of 22.72 per cent, and it has maintained that top-quartile performance over the past year too, having generated a 4.33 per cent return.
EDITOR’S PICK
Invesco Perpetual High Yield
This £132.4m fund boasts several years of outperformance, ranking it in the top quartile of the IA Sterling High Yield sector over one, three, five and 10 years. In the past three years to May 5 it has returned 36.59 per cent, compared to an average 22.72 per cent delivered by the sector. Co-managers Paul Read and Paul Causer are joined by deputy manager Asad Bhatti in running the portfolio, which invests primarily in high yielding corporate and government debt. In its latest factsheet, the managers explain that the fund is defensively positioned. “Many of our holdings are in the financial sector, which we think have the type of defensive qualities we are seeking,” the managers state.
