These near record low yields lead many to naturally ask the question, is there still value to be had in high yield investing? Well, we see the answer as yes and no. For the indexes and passive products, as noted above, this negative convexity is a pervasive issue and will likely lead to principal losses for certain securities.
And in many cases we don’t see the yield as sufficient for the risk being assume, yet these funds have no ability, based on the fund mandate, to sell these securities. So in today’s market, we don’t see attractive value in the passive, index-based products.
Yet for active, unconstrained investors, we certainly see a different situation. Active managers can capitalize on these premiums by selling these over-valued securities and locking in their gains, and redeploy proceeds into better yielding securities. There are still plenty of bonds and loans in the market offered by sound companies, as well as some dividend paying equities, at what we see as attractive yields.
We view this flexibility to participate in the entire capital structure of a company as an important benefit in this environment. Able active managers can weed out the selective opportunities from the over-valued, low yielding securities. Investing still involves buying low and selling high. To buy and hold forever is not a strategy. It works when money is rapidly flowing into the asset class, but that pace has slowed and now investors must factor in call prices and potential principal losses. Now it is time for active management and unconstrained investing.
1 Data sourced from Bloomberg, based on holdings of iShares iBoxx $ High Yield Corporate Bond ETF as of April 25, 2014. Holdings, prices, and other statistics subject to change.
2 The yield on the Bank of America Merrill Lynch High Yield Index as of 5/1/14. The Bank of America Merrill Lynch High Yield Index monitors the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market. Index data sourced from Bloomberg.