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Holly Cook: At the Morningstar Investment Conference, I asked M&G fund manager Stefan Isaacs whether the stellar performance of high-yield in 2012 and ongoing strength in recent months is getting him nervous yet. Here is what he had to say.
Stefan Isaacs: I think we went into 2013 feeling that the high-yield market could certainly hold its own. We felt that a sort of coupon clipping year was in order, so most of the returns would come from the income that the asset class generates rather than any significant capital gains. Market has, as you rightly say, run ahead of those expectations. So it probably does leave you feeling less comfortable about what we’re likely to see in the latter half of the year. So we have been a little bit more prudent in terms of the risk that we’re willing to take in the portfolios, and perhaps as spreads continue to tighten, the right thing to be looking for is a quality bias.
Cook: Now one of your peers yesterday at the conference actually said that he felt that all income-generating assets right now are expensive. Is that a view that you would agree with?
Isaacs: Well, I think, you can probably construct an argument where, given central bank policy, we have seen a reflation of asset prices, and perhaps they are out of kilt with the economic fundamentals and I think that’s a reasonable argument. That’s not to say that it can’t be sustainable for a long time nor can’t continue to see those prices rise even further. Clearly, it’s causing some concern for central bankers. It is getting more and more attention. But I think that the policies that the central banks have put in place, providing excess liquidity and forcing investors to move out of risk-free assets and into riskier assets, isn’t likely to change anytime soon. So I think that whilst I – I think you need to be very acutely aware of the run-up we’ve seen in asset prices. You also need to recognize that the technical remain very, very supportive of those prices.
Cook: So there is still a role for high-yield in the investors’ portfolio. I mean, equities have been back in favor. So you still think the high-yield has a purpose there for your average investor?
Isaacs: I think we would say that an investor should probably have a diversified portfolio anyway, so there is a place for it. You may think that two years ago it would warrant a larger exposure in investors’ portfolio perhaps than it does today. But I would also way that high-yield has produced a very attractive risk-adjusted return over more than a decade. It certainly held its own relative to a number of other asset classes. So I think it still justifies a place in investors’ portfolios, but conscious that the valuations have run a long way. The economic fundamentals still remain weak, and consequently you probably want to be looking for a quality bias within portfolios.
Cook: Well, Stefan, thank you very much for your time today.
Isaacs: Pleasure. Thanks.
