Bond Funds ease access to the High Yield Market
The European High Yield bond market has had a good run as the continuous search for yield which has taken hold of investors in the current low-interest rate environment has continued unabated. Many companies have taken advantage of these conditions to refinance their debt and hence the size of the corporate bond market increased significantly, compensating somehow for shrinking bank lending activity. Year-to-date the total return for the asset class is about 5%, even as investor appetite for risky assets has been challenged by geopolitics and mixed macro data.
Notwithstanding the healthy pipeline of new bond issuance, direct access for retail investors continues to be hindered by generally low yields, as well as minimum trading lots and large institutional take-ups. Interestingly, the primary market has lately generated a number of opportunities for above-benchmark returns as these are often yielding more than seasoned issues.
Against this backdrop, investing in the high yield market through dedicated funds appears increasingly attractive as these products allow the spreading of risk through diversification, access to more specialised investment strategies and cost effectiveness. By delegating the investment decisions to a professional Fund Manager, an investor is essentially ensuring that the portfolio is being actively managed and re-balanced in response to the daily complexities of today’s international financial markets, something difficult to achieve within small portfolios.
Through a high yield bond fund, a private investor could also gain measured exposure to products which might otherwise not be suitable for such a profile. An example is the new style bank capital instruments, for which appropriate fundamental analysis is required as differentiation between issuers becomes crucial.
Specialised funds also have the added benefit of augmenting the liquidity of a bond portfolio as investors can often redeem all or part of their investment in a fund at any time. What is more, in the meantime, any distributions that are paid can be automatically re-invested, ensuring that investors remain fully invested, thus maximizing returns through compounding.
When selecting a fund, some basic criteria to consider include:
Structure of the Fund: Selecting an experienced investment manager that operates within a well-known jurisdiction is important. In this respect, UCITS funds are ideal for retail investors as they have been specifically designed to ensure diversification and liquidity through carefully carved out investment parameters and limits.
Total Expense Ratio (TER): No surprises here, but the lower the overall running cost of the Fund, the greater are the chances that the Fund will generate superior returns. It is advisable that one enquires about the TER as opposed to the Annual Management Charge. Generally bond funds are most efficient when the TER ration is less than 2%.
Track record: Though the past is never a guarantee of future success, Fund Managers with a proven track record should be preferred over others.
There is little doubt that the sizable drop in yields has left retail investors striving to find high-return assets but at the same time, the conditions remain supportive for credit markets and skillful Fund Managers, and their investors, stand to benefit.