Fixed income
Investing in high yield corporate bonds with a global perspective
5 min read 14 Mar 23
High yield corporate bonds have come a long way since the asset class first emerged in the late 1970’s, initially as downgraded investment grade bonds (“fallen angels”) and subsequently as ways for investors to finance acquisitions through leveraged buyouts. As the asset class has grown, it has become much more diversified by issuer, currency, credit rating, sector and region over time. Yet, in our view investors sometimes fail to reap the full diversification benefits of the asset class, for example by allocating only to the largest regions or the ones they are most familiar with. In the below piece, we look at some key reasons why investors should consider investing in high yield corporate bonds with a global perspective.
1) High yield corporate bonds: an increasingly global asset class
While for many years the high yield bond universe was dominated by North American issuers, this is no longer the case today as high yield companies have sprung up from all over the globe. Representing 52% of the bonds in term of face value, US and Canadian issuers still represent the majority of the approximately $2.4 trillion universe, but with close to $600 billion of bonds outstanding, Europe now represents by far the second largest regional bloc. In addition, the relative size of Europe has been increasing over time, from around 10% of face value 20 years ago to close to 25% today. Following Europe, emerging market companies from Latin America and the Middle East and Africa have also been growing quite consistently, and now each make up about 9% of the total high yield corporate bond universe. The last significant regional high yield bloc is EM Asia, which despite having shrunk over the last couple of years, still represents around 5% of the total high yield corporate bond universe.
With a growing share of the total high yield universe and over $1 trillion in total face value, it makes sense in our view for investors to also seek opportunities outside of the US when investing in high yield. In addition, given the era of heightened geo-political risks that we now live in, investing with a global perspective is in our view of the utmost importance nowadays.
2) Global high yield offers potential to diversify across industrial sectors
The global high yield markets have expanded geographically over time, but also allow investors to increase the opportunity set from a sector perspective. For example, while TMT (technology, media and telecommunications) companies have a strong presence in both Europe and the US, they make up a smaller proportion of the high yield index in EM Asia. On the other hand, the US markets have consistently had a bias for energy, leisure and healthcare, while European companies are more prevalent in the financials and automotive space.
These sector compositional differences have sometimes led to significant divergences of corporate defaults over time. For example, the bursting of the technology bubble in 2001-2002 had a larger impact on European high yield, as the universe was still quite small at the time and dominated by a few highly levered cable and telecoms companies. More recently, the 2015-2016 energy crisis had an outsized impact on US high yield, as the collapse in the oil price put significant pressure on North American commodity related businesses. Finally, in recent years, EM Asia high yield has also been disproportionately impacted by the retrenchment in the Chinese property sector, which has also led to higher levels of bankruptcies and restructurings.
Overall, even though default cycles are often related across the globe, ensuring high yield corporate bond portfolios are well diversified by issuer, sector and regions can help to mitigate losses coming from bankruptcies in times of crisis. We would also advocate that investors size their positions appropriately and avoid large concentrated exposures to certain smaller sectors or regions.
3) High yield corporate bonds: Compelling long term returns across regions
While specific regions may underperform at certain points in time, over the long term we see value in investing globally within high yield. For example, in the table below we can see that no region has outperformed for 3 consecutive years[1], which highlights the attractiveness of each region on a standalone basis.
1US Dollar hedged total returns from December 31st 1999 to December 31st 2022.
Focusing at European high yield, while it has sometimes been overlooked by some investors due to its structurally lower yields and interest rates, the asset class exhibits in our opinion certain attractive defensive characteristics, such as lower levels of defaults over time and higher average credit ratings. The total returns of European high yield corporate bonds (also in USD currency hedged terms) have also been quite compelling over the long run, even outperforming North American high yield bonds over the last 10 years.
As a result, we believe all regions may have an important role to play in the asset allocation of investors who wish to be globally diversified.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.
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