“Stubbornly low yields have made income tough to come by in recent years, and that has sent investors searching for yield and income wherever they can find it,” said Koesterich.
“While we support the idea of looking for income in new places, doing so without careful consideration of the risks can be a dangerous prospect.”
He cites the recent example of an auction for Greek bonds which was highly oversubscribed and received far more investor than attention than was justified, in his view.
Instead, investors looking for additional yield could be well advised to look in areas such as high yield.
“There are some asset classes that offer good relative value,” said Koesterich.
“High yield appears fundamentally attractive, offers decent yields and the prospects for relatively low volatility.”
Tatjana Greil Castro, managing director and portfolio manager at high yield specialist Muzinich, said she believes high yield bonds still offer an attractive return.
“In terms of how we see the market, clearly high yield companies do have a higher likelihood of default. How far are we in the cycle where we will see default rates rise? This is still in the future, which gives some comfort. Capital should be safe.”
While a rise in default rates is not imminent, Greil Castro stressed Muzinich is always very selective when looking at high yield issues, avoiding companies that are likely to struggle or restructure in the future.
“You have to be very diligent and experienced. That’s what we focus our time on.”
High yield bonds offer both the coupon payout and a degree of capital appreciation, she noted.
This careful analysis of the market is essential in order to identify only the best opportunities, in Greil Castro’s view.
“A few years ago, coming out of the crisis, we saw only stronger business models come to the market. They were the only ones to pass the sniff test. In today’s environment, looking at the quality of issuance overall, we see weaker business models being able to get funding. In this market environment there are more ‘tourists’ sniffing around high yield. This is a time when fewer of the companies presented to us will be accepted [into portfolios].”
Greil Castrol is keen on sterling denominated high yield bonds, either from sterling issuers or periphery issuers in sterling.
“We’re holding company debt of British water companies. These are strong, dependable, defensive business models in a well regulated sector.”
Insight’s fixed income managers Rodica Glavan and Colm McDonagh believe there is also value to be found in emerging market high yield corporate, with spreads over US high yield at their widest for some time. With yields likely to sit around the 7.5% mark over the next 10 years, the pair believe this offers good value.
