US and Emerging Market High Yield presents opportunity for investors
While the yield environment for fixed income assets remains generally subdued due to ongoing economic uncertainty, high yield remains one area which continues to display attractive income-generating qualities for yield-seeking investors.
Ece Ugurtas, Head of Credit Investing at Barings and Investment Manager of the Baring High Yield Bond Fund, commented: "Valuations for high yield bonds are becoming increasingly attractive with the backdrop of uncertainty in Europe. Government bonds, such as US treasuries and UK gilts, currently maintain low-yields, a result of their ‘safe-haven' status. The global high yield market is yielding 8.1% (as at the 25th May 2012) compared to just 1.7% in 10 year US treasuries.
Ece Ugurtas continues: "An alternative to government bonds for investors willing take a little more risk within a well-diversified investment portfolio is higher yielding fixed income assets such as high yield bonds and emerging market debt. We are seeing more and more investors searching for superior-yielding bonds. Looking ahead, we believe that both high yield bonds and emerging market debt will continue to produce a superior level of income relative to other parts of the fixed income universe.
"Fundamentals in the high yield market, such as a record low default rate, remain sound. New issuance has been mainly to extend maturities and shore up liquidity. Whilst we do not rule out short term volatility as investors switch between an optimistic and pessimistic view of the world, we expect the high yield corporate bond market to continue to offer attractive risk adjusted returns."
This view is supported by recent central bank announcements to implement "pro-growth" monetary policy, most notably in Europe and the US. The Federal Reserve recently pledged to keep rates "exceptionally low" until mid-2014.
The combination of robust fundamentals of the asset class and a recent period of market weakness represent an attractive buying opportunity for investors.
Ece Ugurtas: "We believe High Yield bonds continue to be supported by attractive fundamentals in the form of strong balance sheets and manageable maturities together with attractive valuations with spreads pricing in excessive default rates. As yield hungry investors have limited alternatives within fixed income markets we believe they will increasingly turn to this asset class.
The fund is sized at US$790.7m as at 30 April 2012 and has performed ahead of (+9.4%) the Bank of America Merrill Lynch Global High Yield BB-B benchmark index (+7.7%) YTD. The fund is well positioned to combat the threat of European stagnation in growth with significant exposure to US High Yield Corporate Bonds (59%) and EMD High Yield Corporate Bonds (18.3%). It has a minimum investment of US$5,000 with annual management charges of 1%.