No one really knows where to put investment dollars anymore. At the most basic level, investors tend to be most fraught with choosing between equities and fixed income. Are they looking for capital gains? Or are they looking for income and a safe haven for their portfolio?
Traditionally, investors wanting to have both these goals satisfied simultaneously have used balanced funds or equity income funds. These are portfolios of higher dividend equities and more conventional bonds. But instead of trying to accomplish this goal by simply mixing different proportions of what most investors can buy on their own, why not use an asset class that is inherently unlike either ingredient?
Below investment grade, or high yield bonds, have historically been more correlated with equities than investment grade bonds. Yet they carry a substantial pick-up in income over both more traditional asset classes.
Over the past ten to fifteen years, this asset class has become more global. It is now a much larger asset class with a set of issuers and investors that spans more parts of the world than it did before.
Like many other newer asset classes, this recent entrant is often misunderstood. But it tends to be these asset classes, the ones that get less of the limelight, which can make the most attractive investments.
What makes global high yield unique is the way it behaves. We like to look at it as a high dividend, low beta* equity. In simpler words, it’s a fixed income asset that acts like an equity one: not fully one and not completely the other. Think of it like a third asset class.
In the past decade, global high yield returned higher than several stock market indices, including both the S&P 500 and Russell 2000, according to Bloomberg data. Moreover, annualized returns have been about 3% higher (double in some cases) than other fixed income assets including 5-year and 10-year Treasuries.
Global high yield bonds also have a lower duration than several other types of bonds. Duration measures bonds’ sensitivity to interest rate movements.
While global high yield has provided very competitive returns along with asset diversification, it is not an asset class that is amenable to frequent trading. It requires a more strategic, rather than tactical allocation. While global high yield can provide income and more stability than is typical of equities, it is still more correlated with equities and can therefore be more volatile than higher quality bonds.
Rising interest rates can also potentially introduce an element of volatility, but the fact that rising rates are normally associated with improving economies should make these periods more like shorter term tantrums than a real illness. So global high yield calls for investors who can think and stay long-term minded.