The perception among investors often seems to be that the only place to get a real return is in the equity markets. However, history has clearly proved otherwise. In fact, looking over the past 5 and 15 years, the high yield market has actually outperformed equities on a pure return basis and over the past 25 years, has performed relatively close to equities but with nearly half the risk, for a clear risk adjusted outperformance by high yield bonds.2
It should also be noted that while high yield bonds are perceived as “risky” by some, they rank higher on the capital structure than equities, meaning that if something were to go wrong with the company, the bondholders are among the first to get paid, while the equity holders are last in line.
We have likened the equity market before to a casino: in many cases, you are rolling the dice with a purchase, hoping that someone will pay more for it later. In the high yield bond market we benefit from the fact that we have a set maturity date at which we are paid back par value for the bonds and during the holding period, we are promised semi-annual coupon payments, so are able to generate tangible yield.3 With equities, there is no obligation to make any sort of dividend payment and you could be left waiting a lot longer than you intended for others to agree with you on the value of the stock and for the price to appreciate.
We look at the equity game as largely just that…a game. It seems to us that on a risk adjusted basis, the high yield market offers a much more compelling prospect for investors. This often overlooked and misunderstood asset class deserves some attention.
1 Source: Data sourced from http://www.multpl.com/shiller-pe/.
2 Source: Credit Suisse High Yield Index data from Credit Suisse. S&P 500 numbers based on total returns via Bloomberg. Calculations based on monthly returns and standard deviation is calculated by annualizing monthly returns.
3 This assumes that bond does not default or undertake any sort of restructuring prior to maturity.
Heather Rupp, CFA, Director of Research for Peritus Asset Management, the sub-advisor to the AdvisorShares Peritus High Yield ETF (HYLD), compares the high yield and equity markets.