High yield investors reap rewards of market rally

Investors with exposure to high yield bonds have reaped the rewards of the recent market rally, with the sector outperforming equities during the first half of 2009; whilst the Merrill Lynch Global High Yield Index returned 29.5% during this period, the MSCI World Index returned 6.8%.

F&C's Fatima Luis has been one such investor who has seen an improvement in the performance of her funds as a result of their exposure to high yield. Her F&C Extra Income Bond and F&C Strategic Bond funds -which invest in both investment grade and high yield bonds - returned 10.42% and 15.06% respectively, against a return of 5.26% in their benchmark index, IMA Strategic Bond; whilst F&C Maximum Income Bond fund - which focuses exclusively on high yield - returned 20.4%.

"The bond market has suffered substantial losses since the onset of the credit crunch and subsequent global recession and the performance of fixed income funds has inevitably been impacted," said Luis. "Whilst others sold out of the high yield sector in an effort to minimise risk, holding steady and actually adding to the sector during such extreme valuations proved to be the correct strategy. The result is that the funds have all done well in the first 6 months of 2009, due to their positions in high yield."

"There were a lot of stocks which may have been considered as higher risk last year but, had we cut high yield in line with market consensus, we would have missed out on high, double-digit rises on some names, such as Cirsa and Tereos. Furthermore, the strong performance in high yield has encouraged the market to open up to large, somewhat riskier issuers as demonstrated by how well Italian telecom company WIND's new sub-investment grade bond issue was received."

Luis cautions that, despite many signaling the bottom of the market, there is a long way to go before a sustainable upturn can be called. "There are still some major headwinds against the market, such as rising unemployment, consumer and corporates electing to save rather than spend and inflationary pressures. This is not going to improve the state of the global economy any time soon and it is likely that there will be further pauses in the market recovery in the coming months," she concluded.