Investment managers are extending their high-yield bond capabilities in the U.S. and abroad as investors globally are reaching for better risk-adjusted returns with lower volatility, all within the confines of a zero-interest-rate environment.
As an asset class that straddles fixed income and equities, high yield is attracting investors from two camps — those chasing a higher risk/return profile for their fixed-income strategy and those searching for a less volatile equity surrogate, consultants said.
“U.S. high yield, relative to other (investment) options, is still paying interesting returns with potential for further appreciation,” said Daniel Celeghin, partner at Casey Quirk & Associates LLC, Darien, Conn., which advises money managers on business strategies. “There's a real hunger for higher returns, and no obvious place to get those returns.”
Inflows are far from the levels seen in 2009, when there were 454 high-yield hires totaling about $35.2 billion following the bankruptcy of Lehman Brothers Holdings Inc., according to data from Eager, Davis & Holmes LLC, Louisville, Ky.
In 2011, the number had dropped to 212 mandates totaling $27.8 billion.
But evidence suggests investments in high yield are holding their appeal and trending upward, with more investors seeing the asset class as “a strategic part of the institutional asset mix compared to the tactical bets implemented a few years ago,” said Dik van Lomwel, managing director and head of Europe and the Middle East at Neuberger Berman Europe Ltd., London. The firm had $15.2 billion in high-yield strategies as of Dec. 31.
“Just as we saw in 2008-2009 in the aftermath of Lehman Brothers, spreads widened in October (2011) well above fair value. At the same time, the fundamentals of the market remained strong — significantly stronger when compared to the 2008-2009 period,” said Michael Brownell, vice president and product manager on the high-yield team at Pacific Investment Management Co. LLC, Newport Beach, Calif. “The volatility in the third quarter of last year presented investors with an attractive entry point into high yield.”