As expected, 2022 looks set to be a turbulent year for fixed income assets. High-yield bonds shared in the blows dealt in the first quarter.
The ICE BofA Glb High Yield Constrained Index closed the first quarter of 2022 with a 4 percent loss measured in euro terms, while the Morningstar Global High Yield Bond category posted a 2.7 percent loss. Last year, the index was still up 9.1 percent. The ICE BofA US High Yield Effective Yield, the effective yield of the index discussed above, appeared to be consolidating between 4 percent and 5 percent at the end of last year, a historical low, but has since risen above 6 percent. The European equivalent closed last year at 2.8 percent, but on Friday 22 April it rose above 4.5 percent.
The losses are mainly due to the general rise in interest rates. The Bloomberg Global Aggregate index recorded a loss of 4.1 percent in the first three months of 2022 and the Fed is expected to raise policy rates by 50 basis points next month.
Rise in real yields
The rise in US real yields is caused by nominal yields rising more strongly than inflation expectations. The 10-year US Treasury Yield already rose more than 140 basis points this year to around 2.9 percent on Friday 22 April, while five-year inflation expectations are now around 3.4 percent, up some 50 basis points from the end of last year. The Fed is pushing up interest rates and reducing its purchases of long-term bonds, which could boost their yields. At the same time, the tightening of central bank policy is keeping inflation expectations in check. For now, bond markets rate the risk of recession as fairly low.
Narrow spreads and less liquidity
This also seems to be the case in the credit markets. Spreads remain very narrow by historical standards. The ICE BofA US High Yield Index Option-Adjusted Spread closed 2021 at 310 basis points and peaked at 416 basis points on 15 March before correcting again. European high-yield spreads made a similar move. Narrow spreads are normally only justified when there is a smooth policy environment and/or stable economic growth. This is hardly the case today, as central banks are raising interest rates because inflation is high. Some investors therefore predict that spreads will eventually have to rise to compensate investors for the higher risks.
After several companies raised a lot of money in the bond market in the first weeks of this year, in an attempt to maintain low interest rates, the European high-yield markets are now largely dry, as Max Severijns wrote here.
Top 5
For this week’s Top-5, we look at mutual funds in the Morningstar Category Global High Yield Bond whose distribution fee-free share class is available in the Netherlands. These five funds have shown the best performance based on Q1 2022 returns.
UBS (Lux) Floating Rate Income fund
The UBS (Lux) Floating Rate Income fund is on the top rung. This strategy has a volatile annual return. It finished in the first and second quintiles in 2018 and 2021 but ended up in the lowest quintile in 2019 and 2020. The fund is managed by Matthew Iannucci, Anaïs Brunner and Branimir Petranovic. Iannucci, the global head of high yield developed markets has worked for UBS for 26 years and is based in Chicago. Brunner and Petranovic have also worked for the Swiss asset manager for many years.
M&G (Lux) Global Floating Rate High Yield Fund
Again in the top five is M&G (Lux) Global Floating Rate High Yield Fund managed by James Tomlins and Stefan Isaacs. The fund already finished 2021 in the top decile of the global high yield bond Morningstar category and is continuing that trend for now. However, in the two previous years, it underperformed by finishing in the bottom quintile of its category each time. This fund was given a Neutral rating by Morningstar analysts until recently, but coverage was terminated due to insufficient conviction in the strategy’s potential to beat the category benchmark. Both men also manage the British M&G Global High Yield Bond fund, which has a Bronze rating.
Robeco High Yield Bonds fund
Rotterdam-based Robeco is also on the list with their Robeco High Yield Bonds fund. The top ten positions mainly consist of BB-rated large caps in the communications and consumer products sectors while the managers take a cautious view due to the concentrated telecoms sector. A large overweight in media is Netflix and the portfolio also includes larger positions in Goodyear and Kraft Heinz Foods. The fund has been managed by Sander Bus and Roeland Moraal since March 2001 and July 2003 respectively.
Based on Netherlands’ fund classification:
Based on Belgium’ fund classification:
Thomas De fauw is a manager research analyst at Morningstar. Morningstar analyses and rates investment funds based on quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five investment funds or providers each week.
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