Funds for ‘safe yield’ hunters
AllianceBernstein explains the rationale behind its latest products focused on emerging markets and high yield corporate bonds.
Ask investors what they most want at present, and many answer ‘safe yield’. Over much of the past decade, carefully selected fixed income – both debt and credit – fulfilled this role.
Debt offered stable returns that beat low inflation. Corporate bonds outperformed inflation with manageable default rates. But this landscape changed hugely since 2008.
‘Safe harbour’ lenders are popular because their debt is ‘safe’ in terms of coupon payments, but it offers no yield, even negative yields (for example, bunds). Or it offers so little, it has limited use for returns (for instance, US Treasuries).
One investor said the debt was “not risk-free return, but return-free risk”.
The average, GDP-weighted yields for core European countries fell from nearly 4% at the start of 2011 to more than 2% 12 months later.
Yields for peripheral Europe’s debt are high for good reason, say many investors, who avoid the asset. Investors value financials to an extent on the basis of their exposure to these troubled peripherals.
The GDP-weighted yield on the debt of Greece, Ireland, Italy, Portugal and Spain rose from more than 4% in January 2011 – not far above core Europe’s measure at that time – to about 9% by 31 December.
Asset managers such as AllianceBernstein are therefore looking elsewhere to give clients safe yield. The firm already runs $216bn in fixed income, ranging from sovereign debt to high yield.
Last year, it launched a Ucits fund focused on Chinese offshore bonds and higher yielding Asian bonds, hedging currency exposure back to Chinese renminbi to benefit from FX appreciation and Chinese economic strength. It has also launched a short-duration, high yield global credit fund targeting quality high yield corporate bonds rated B and BB, while reducing volatility by having an average maturity profile of four years or less, and by using some hedging.
They can appeal to two kinds of investors, as Ivan Rudolph-Shabinsky (pictured), manager of the Short-Duration High Yield fund, explains: “Some people say they need higher risk assets in their portfolio, but are uncomfortable with the volatility of equities, or already have too much there. Our fund offers a way to get more exposure to risk markets in an efficient way with less volatility.”
Jeremy Cunningham, senior portfolio manager at AllianceBernstein, adds: “Investors at the naturally conservative end of the spectrum are looking at low levels of yield from government bonds, and asking how to get prudent exposure to the high yield market.