By mid-June 2022, the gross yield to maturity of the Liontrust GF High Yield Bond Fund was now well over 10% for a dollar investor. This translates into a return of over 7% for Swiss-based investors. Despite the higher volatility than other fixed income segments that we have observed for some time, we continue to like high yield.
One of the main reasons we favor high yield bonds is because of their intrinsic driver of income. This allows them to be resilient when the performance of capital alone is challenged during times of stress. We can see this today: high yield is performing close to -11% since the start of the year, while European government bonds have generated a performance of around -15% and European equities have around -25% (source: Bloomberg, as of 06.15.22).
We are not announcing the bottom of the market, but we believe that high yield represents a good long-term opportunity and that this asset class is destined to recover. When the market stabilizes and fully reopens to new issuance, we will see coupon hikes: companies will issue bonds offering higher yields than we have seen in recent years. As an example, let’s say the average coupon is expected to rise to 6% next year. In a market of 2,500 billion dollars, this represents 12.5 billion dollars in additional revenue.
In the meantime, there is significant upside potential in capital. The average price of a spot bond has fallen to 86% (with the vast majority of bonds redeemed at 100% or more), compared to an average of 104% at the same time last year. If we adopt a more pessimistic perspective, defaults could annihilate this expected increase in capital (convergence towards par). However, if we consider bonds rated BB and B- (excluding CCC issues which present the greatest risk of default), the average price is still 87.5% against 106% a year ago.
It is undoubtedly a daunting time to invest in assets of any kind and there is absolutely no telling whether the value of assets will rise or fall over the next three to six months. . But in the longer term, we are convinced that the generation of income by the high yield market will be the main characteristic of this asset class (as it has always been the case), and that investors will have benefited from a certain increase in their capital over time.
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Past performance is not a reliable indicator of future performance. The value of an investment and the income from it can go down as well as up and is not guaranteed. You are likely to get back less than your initial investment.
The issue of units/shares of Liontrust funds may be subject to entry charges which will have an impact on the realizable value of the investment, particularly in the short term. Investments should always be considered long term.
Any investment in the GF High Yield Bond Fund is exposed to foreign currencies and may fluctuate in value due to changes in exchange rates. The value of bonds will decline if the issuer is unable to repay its debt or if its credit rating is downgraded. Generally, the higher the perceived credit risk of an issuer, the higher the interest rate. Bond markets may be subject to reduced liquidity. The Fund may invest in currencies of emerging/unstable countries and in financial derivative instruments, which may increase volatility. The fund may invest in derivatives. The use of derivatives may create leverage or financial leverage. A relatively small movement in the value of the underlying of a derivative may have a greater impact, positive or negative, on the value of a fund than if the underlying were held instead.
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