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Fund Review: High Yield Bonds


Figures from the Investment Management Association (IMA) show the IMA Sterling High Yield sector saw net retail sales outflows of £12.3m in March this year, although that followed inflows of £15.4m in February.

A closer look at the returns delivered by high-yield bond funds reveal that decent performance can be found. In the year to May 15 2014 the IMA Sterling High Yield sector returned 6.02 per cent, placing it second quartile. More recently, performance has dropped to third quartile, the sector having delivered a return of 4.62 per cent in the past six months to May 15, according to FE Analytics.

However, those invested in the sector for the 10 years to the same date will have secured a respectable 95.23 per cent return on their investment.

Donald Phillips, co-manager of the Baillie Gifford High Yield Bond fund, refers to the yield on the European High Yield index, which is at 3.75 per cent, as being low in terms of the history of the European high-yield bond market.

Mr Phillips says: “The bond market has been so open to new issues that many companies have taken the opportunity to refinance their bank debt and refinance their bond debt so that, generally speaking, most companies don’t have much to refinance in the next year or two.”

He claims the high-yield market should be considered a “cousin of equities” in terms of volatility.

Mr Phillips adds: “People should be aware the high-yield market is cyclical: it is volatile even though the past few years have perhaps not suggested that.

“Yields are very low. I don’t think the default rate is particularly high but people have to be conscious that volatility hasn’t been there and is likely to come back in the future if and when monetary policy is less supportive of markets.”

On a regional basis, Debbie King, a fixed income manager in Kames Capital’s high-yield team, says their preference is for US over European high-yield bonds, citing strong fundamentals in the US market and an economic cycle that is further along than that of Europe’s.

She suggests the recent pick-up in merger and acquisition activity in the US could lead to more leveraged buyouts and capital investment.

Ms King concludes: “Overall the US economic outlook is supportive for corporate health, which should ensure the default rate stays low. The European market is also far less mature than the US. The US market is roughly five times bigger, is more mature and enjoys better liquidity.”


Aviva Investors High Yield Bond

This offering from Aviva Investors is placed second in the IMA Sterling High Yield sector across one year to May 15 2014, and has achieved top-quartile performance across three years as well. Manager Chris Higham has an objective that sees at least 50 per cent of the portfolio in high-yield bonds and may invest in global bonds issued by companies, governments and large international organisations in a range of currencies. Typically 80 per cent of the bonds in the fund will be hedged to sterling. The fund is only £79m in size since launching in September 2008, suggesting it is little known by investors in the high-yield space.

AXA Pan European High Yield Bond

While the fund’s performance for the 10 years to May 15 2014 places it bottom quartile in the IMA sector, its recent outperformance means it could be one for investors. The £28.3m fund, which is managed by James Gledhill, invests in high-yielding European corporate bonds, bonds issued by European governments and other European fixed interest instruments. In a three-year period, the fund has returned 25.73 per cent to investors, placing it top quartile in the sector, compared to the average sector return of 21.14 per cent.


Kames High Yield Bond

Philip Milburn has run this £1.7bn fund since November 2003. Fixed income investment manager Claire McGuckin joined him in September 2013. The fund has a record of outperformance in the IMA Sterling High Yield sector in which it ranks fourth place for performance across 10 years with a return of 112.9 per cent, against a sector average of 95.23 per cent, according to FE Analytics. It aims to maximise total returns by investing primarily in high-yield bonds, cash and selected investment-grade bonds.

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