Investment insight: Sterling High Yield

Table 1 (bottom of article) shows the top 20 funds listed in order of performance over five years based on an initial £1,000 investment, according to FE data. Over this period, the average fund has achieved growth of 7.1 per cent pa – a figure that any equity-based fund manager would be proud of. Yields were particularly impressive around the turn of the decade with the average fund seeing returns over 9 per cent for three consecutive years between 2011 and 2014.

The top-performing fund, the £126.7m Invesco Perpetual High Yield fund, has grown by an average 9.7 per cent – providing a strong indication of the reduced volatility within high yield bonds. During 2012/13, the fund grew by 21.8 per cent, showing that huge returns are still possible in assets that investors generally lean towards to provide security.

Of the underlying assets, more than 72 per cent is invested in corporate bonds with roughly 10 per cent in government bonds. 

Corporate bonds are generally riskier than their government counterparts, as companies are more likely to default, so to attract investors they need to offer higher yields. The managers  – Paul Causer and Paul Read – have clearly been adept at selecting good quality corporate debt to outperform the sector.

Regionally, the UK is the fund’s largest weighting, with nearly one-third of the fund invested, while banking represents the preferred sector with more than 27 per cent allocated.

When analysing the lower end of the Table, the consistent performance of bonds during the past five years becomes more apparent. L&G’s High Income Trust may not have grown as favourably as others, but it has still achieved an average of 5.8 per cent pa. Added weight to this consistency can be seen over three and 10 years, with average growth of 5.4 per cent and 4.7 per cent, respectively.

Even in the short-term, returns in the sector have been impressive. A £1,000 investment on 1 September 2015 into the average high-yield fund would have increased to £1,065 over a 12-month period. This proves that the importance of holding high-yield bonds in a portfolio to not only provide a cushion for more adventurous assets, but also some solid growth.

Bank action

Recent intentions by the UK’s central bank are likely to have a significant impact on the high-yield market in the coming days, months and years. On 12 September, as part of its quantitative easing programme, the BoE laid out plans to purchase a portfolio of up to £10bn investment grade bonds, financed by central bank reserves, via the Asset Purchase Facility (APF).