Higher yields do not always mean grossly higher risks, says Pioneer Investments' Greg Saichin. He tells Funds Europe why cautious investors should look at this fixed income asset class.
The high yield bond market might be seen as a risky pool to swim in but is it possible that even conservative institutions might find solace there?
It is according to Greg Saichin, head of high yield fixed income portfolio management at Pioneer Investments. He also says that the changed economic landscape of the past few years means today’s euro-based investors can find all the high yield they need at home, negating the need to deal with the US market, which is traditionally the biggest.
“An institution wanting to build a more conservative portfolio can achieve it by moving into the double-B euro high yield spectrum,” he says.
Sixty-seven per cent of the most popular euro high yield index is made up of companies with a double-B credit rating. In the US universe the number is 41%.
The more risky triple-Cs account for only 5% of the euro market compared with 15% in the US. “There’s plenty of building materials in the double-B space,” says Saichin, who also manages Pioneer Investments’s Euro High Yield strategy.
With a total value of €220 billion and 416 issuers, the euro market is still smaller than the US but it has doubled in size over the past three years.
Importantly, the character of high yield bonds has changed.
Since 2008 companies have made senior secured debt more available to investors. Before that, only the banks had access to much of this while fund managers and others in the public markets were offered mainly the lesser quality junior debt.
“Companies have opened the full range of their debt structures to the capital markets,” says Saichin. This is a positive move offering more choice to investors.
The dynamics behind the market’s growth and changing character go back to when Lehman Brothers collapsed in 2008. In the credit crunch that followed, companies found it harder to obtain loans from the weakened banks.
This forced companies to issue more bonds, but as contagion spread from banks to infect eurozone nations and threaten the very currency that propels them, the euro high yield market itself became tainted as people linked it to the broader euro shock.
Support for this view is understandable. Many banks and some industrials share the same credit rating as their governments. When a sovereign’s credit rating falls, so do a number of that nation’s corporates.
But yields also rise consummately with this. Yield, of course, is the fundamental particle of high yield bonds and lately there has been a 636 basis points spread over the equivalent risk-free bund.
Also increasing commensurately with yield is risk but Saichin says it is a mistake to ascribe too much risk – particularly eurozone-related risk – to high yield companies. Corporate health, he says, is often better than government health because many corporates have managed to diversify their businesses and revenues. For example, more European companies are active now in the emerging markets.
They also have support from the EU and European Central Bank.
Nevertheless, the more companies that slide down the ratings scale and into the high yield pool, the deeper the market becomes – and it is a trend that Saichin expects to extend.
“We are looking at a couple of years at least in which governments will continue to struggle to make ends meet,” he says.
Greg Saichin is head of emerging markets and high yield portfolio management at Pioneer Investments
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