Top 5 Global High Yield bond funds: UBS in the lead

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The risk of recession and persistent inflation resulted in a correction of almost all risky assets. Also high yield bonds ended the first half of the year with heavy losses. An update:

Interest rate hikes in developed markets caused most bond categories to be deeply in the red after the second quarter of this year. High-yield bonds were not spared: The ICE BofA Glb High Yield Constrained Index closed the second quarter of 2022 with a loss of 5.7 percent measured in euros after giving up 4 percent in the first quarter.

The Morningstar Category Global High Yield Bond posted a loss of 7.1 percent over the first six months, with longer-dated funds performing worse than their peers on average. The ICE BofA US High Yield Effective Yield, the index’s effective yield, appeared to be consolidating between 4 percent and 5 percent at the end of last year, an all-time low, but rose to 8.9 percent at the end of June.

In Europe

The European equivalent closed last year at 2.8 percent but rose sharply to 7.3 percent at the end of last month (the ICE BofA EUR High Yield Constrainted Index lost 15.1 percent year to date), an attractive level according to some investors including Michael Della Vedova, the manager of the T. Rowe Price Responsible European High Yield Bond fund which received a Silver rating from Morningstar analysts. Not only do high-yield bonds tend to fare better in an environment of rising interest rates because of their higher yield and shorter duration, the manager rates the risk of a sharp rise in defaults as low.

The worst performing sectors for investment-grade and high yield corporate bonds this year included real estate, which is highly sensitive to growth slowdowns, as well as higher interest rates and energy where Lukoil and Gazprom have a significant weighting in the indices. This means that some of the more sustainability-oriented strategies that shun oil and gas generally held up better than their conventional counterparts.

Widening credit spreads

Rising recession fears have widened credit spreads in recent months, but there is no sign of panic. However, high yield investors are focusing on higher quality BB rated issuers rather than B and CCC rated ones. The ICE BofA US High Yield Index Option-Adjusted Spread closed at 587 basis points last quarter, down from 310 basis points at the end of last year. Since then, however, the spread has fallen back to just below 500 basis points on Friday 22 July. To put things in perspective, in March 2020 the spread briefly rose above 1,000 basis points. European high-yield spreads made a similar, but noticeably sharper move. The spread stood at 641 basis points at the end of June 2022, an increase of more than 300 basis points since the start of this year.

Outflows

Concerns among European investors resulted in outflows of some EUR 5.6 billion for the global high yield bond Morningstar category, while EUR 6 billion and EUR 7.5 billion were taken out of the EUR and USD high yield bond Morningstar categories respectively over the first six months of this year. Within the global category, the five funds with the largest outflows accounted for more than half of total outflows, including AB Global High Yield (Neutral rating) and Robeco High Yield Bonds (Gold rating). Man GLG High Yield Opportunities broke the trend and managed to raise EUR 261 million.

Little action in the primary market

The supply of new high-yield bonds on the European primary market in the second quarter of this year was the lowest since 2012, while 2021 was a record year. A similar picture emerges in the US, where JPMorgan speaks of a 76 percent drop compared to 2021. This makes sense, as companies were quick to issue bonds in 2021 ahead of central bank rate hikes. It remains to be seen when issuers will be forced to return to the market, but it will probably be on less favourable terms.

Top 5

For this week’s Top 5, we look at mutual funds in the Morningstar Category Global High Yield Bond of which a distribution fee-free share class is available in the Netherlands. These five funds have shown the best performance based on the return for the first half of 2022.

The UBS (Lux) Floating Rate Income fund remains on the top rung after the first six months of 2022. 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. Top positions include Ford Motor, JPMorgan and Altice.

Also still in the top five is M&G (Lux) Global Floating Rate High Yield Fund managed by James Tomlins. The fund already finished 2021 in the top decile of the global high yield bond Morningstar category and is continuing that trend for the time being, partly due to its rather defensive credit selection with lower exposure to inflation-sensitive companies. However, in the two previous years, this strategy underperformed, ending up in the bottom quintile of its category each time. This fund was recently given a Neutral rating by Morningstar analysts, but coverage was terminated due to insufficient conviction in the strategy’s potential to outperform the category benchmark.

Ostrum Short Term Global High Income completes our top 5. The fund has been managed by Erwan Guilloux from Paris since 2015. The Natixis manager focuses on researching individual issuers, supported by a team of credit analysts. The strategy targets a short duration of less than two years and has no formal benchmark. According to Guilloux, different segments of the market are now attractive, especially in those bonds with a BB credit rating that have the potential to be upgraded to investment-grade. Furthermore, like Della Vedova, he believes default rates will not rise quickly. As with M&G, this manager remains selective on the primary market.

Top 5 (as per Netherlands fund class)

Thomas De Fauw is a manager research analyst at Morningstar. Morningstar analyses and evaluates investment funds on the basis of quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five investment funds or providers each week.