Summit Funds Focus : Alliance Bernstein on high yield credit

High yield debt is an asset class with further potential if investors can ensure that market volatility is well managed, according to Jeremy Cunningham, senior portfolio manager, Fixed Income at Alliance Bernstein

Cunningham told delegates at InvestmentEurope’s Lausanne summit that although returns from high yield debt have been strong in recent years, “we think there is still good upside potential”.

“It has been a tough time to generate yield, which is at the low end of historical averages,” he added. Some investors might consider emerging market corporate debt for yield, or decide to allocate to less liquid parts of fixed income.

The factors that have created volatility are mainly around government inaction, which translates into austerity programmes across developed markets, especially in Europe, a lack of economic growth, the threat of default and longer term inflation.

He noted that the “fiscal cliff” in the US is another concern. “There may well be a compromise between the leading political parties after the US election in November, but in the meantime investors have to endure a lot of volatility,” he said.

High Yield corporate bonds globally exhibited more volatility than other parts of the fixed income universe, but still less than equities. But there are ways investors can use the volatility, deploying strategies that ultimately reduce their risk profile.

“Our research suggests that with strategies designed to lower the volatility, such as shortened the bond duration, focusing on quality high yield issuers, and employing hedging techniques, investors give up relatively little return over a full market cycle but benefit from stability during a market crisis,” he explained.

Underlying fundamentals continue to support high yield debt. High yield corporates are continuing to deleverage and reduce debt. Companies remain conservative, so the quality of bond issuance is improving.

“We also look at what the proceeds of the issues are used for. We find that capital is being used to refinance companies, shifting the duration of the debt from short term to longer term.”

Default rates are dropping as the debt is better managed. This allows the company a breathing space, where it can take advantage of the improving economic outlook.


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