High-yield bonds are in the eighth year of an investment cycle that has seen assets under management grow threefold, to $300 billion, so interest among investors remains high. And according to three high-yield bond experts speaking at the Morningstar Investment Conference in Chicago, the cycle will continue to expand, presenting global opportunities for investment.
Moderator Sumit Desai of Morningstar began the panel discussion Tuesday by framing high-yield bond growth and volatility, both in performance and assets. For example, the US OE High Yield bond fund has a total YTD return of 5.66%, but a negative 2.34% return over the past year. More interesting is the return on the BofA Merrill Lynch U.S. High Yield Energy Bond index, which has a whopping 18.26% return YTD, but over the past year still has a negative 15.65% return.
“How do high-yield bonds fit into a diversified portfolios? Investors are looking for stability and diversification as a safety net against equities…but some correlation [between bonds and stocks] lately creates confusion,“ Desai asked.
“The main thing an investor should think about is their time horizon when looking at this asset class,” responded Fred Hoff, portfolio manager for Fidelity Management and Research Co. “This asset class has a high level of current income, and every academic study has shown if you hold your portfolio over long period, you could get yield of 8% a year over five to 10 years.”
Michael Hong, portfolio manager at Wellington Management Co. concurred: “A long view of high yield is attractive, especially because income return is high.”
Mark Vaselkiv, portfolio manager at T. Rowe Price, noted that “Einstein said there were three great forces of nature: gravity, electro magnetism, and compounded interest…high yield is an asset class that ultimately capitalizes on the latter. In this market generating 7%-8% per annum, over 20 years is significant; $100,000 invested in a high-yield fund 20 years ago is worth $400,000 today. I agree that you take a long-term view with this asset. “
Desai said that high-yield bonds also mean high risk, and pointed to the volatility of high-yield energy bonds, especially in the past year. The panel wasn’t overly worried about that shorter-term volatility, largely due to their position that high-yield should be seen as a smart long-term investment.
“The impact of energy going forward is less exciting than the last 24 months,” Hoff said. He added that the price of oil falling $100 per barrel, and then rebounding to the high $40s shook out the market, noting that if the price goes to $30 again it definitely will impact yields. “Today there are a lot of survivors. Energy is still 13% of the market. We’ve seen smarter companies take advantage of the rebound: we’ve seen them issue convertible bonds, issue equity…The number of risky high-yield companies is down. Today people are more realistic with oil prices. “