Certain asset classes are ideal territories for investors to adopt active management. High yield corporate debt may be just one of them.
With U.S. government debt yields depressed and likely to remain depressed for several years, advisers are looking to other corners of the bond market for income. Predictably, some will embrace high yield corporate debt and associated exchange traded funds.
“Fund managers are not immune to the excesses of the bond market, although the more experienced and skilled among them usually see problems coming, especially when they come in the form of bankers. ‘investment keen to sell heaps of highly leveraged corporate bonds in the same sectors,’ writes Morningstar analyst Eric Jacobson. “It can be extremely difficult to stray too far from a market from the indices against which they will ultimately be compared, as trying to get out early can result in long periods of unflattering comparisons. Disciplined managers also understand, however, that placing 15% or 20% in a single high-performing sector can have the potential to bury them if those industries are sidetracked. “
The challenge of active management
Volatility rankings acted as an early indicator of rating changes. After examining the rating changes from B to BB and vice versa over a period from the 4th quarter of 1996 to the 2nd quarter of 2019, it was shown that the volatility ranking of a bond generally starts to improve 25 to 25%. 30 months before the rating is upgraded. Low volatility bonds have also historically presented less credit risk than high volatility bonds.
“The case for keeping active managers with high yields versus indexed portfolios is not fully open and closed as there are always active funds that manage to find problems when they arise, and a Extremely cheap index funds can seem very competitive depending on the time period and the vagaries of the investment landscape, ”adds Jacobson.
Still, there are more good reasons to consider an active approach in this corner of the fixed income market.
“The high yield market is among those best suited to reward in-depth research for a variety of reasons, however, and most active managers and companies favored by Morningstar analysts are reluctant to follow the credit markets to the top. extremes, whatever their engagement. are benchmarking, ”concludes Jacobson. “There is a lot of room for index portfolios among the higher quality segments of the bond market, but it is worth thinking twice before following it when it comes to buying bond funds at high yield. “
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The opinions and predictions expressed herein are solely those of Tom Lydon and may not come to fruition. The information on this site should not be used or interpreted as an offer to sell, a solicitation of an offer to buy or a recommendation for any product.