Negative interest rates have forced investors to look up the risk spectrum to earn a decent income. High-yield bonds, often called "junk bonds", could be a good option for those willing to want to diversify their portfolio, and adding a pinch of risk to it too.
High-yield bonds invest in companies that whose balance sheets may not be as strong as their peers. The higher likelihood that the firm could miss making interest payments or default on its debt compared to investment-grade issuers, means they have to payer a higher coupon to compensate their investors.
We look at three potential options for high-yield bond investors:
AXA Global High Income
The Silver-rated AXA Global High Income fund has consistently outperformed its category. The aim of the fund is to provide long-term high income combined with some capital growth. It investing across a global mix of sub-investment grade bonds, but the team likes companies with stable business models and predictable cash flows, which should keep default risk low.
The Silver-rated fund – led by James Gledhill and Carl Whitbeck since 2012 – has delivered annualised returns of 4.5% over three years and yields 4%. The managers say the weakest area for returns of late have been emerging markets, held back by economic strife in Argentina, and the lower-rated end of the credit spectrum of US high yields.
Gledhill is based in London and is responsible for the fund's European exposure, while Whitbeck is based in Connecticut and looks after the US side of things. As well as the extensive experience of the two managers, Morningstar analyst Evangelia Gkeka likes that they have a team of 11 credit analysts whose skills they can also draw upon.
Around 95% of the fund's assets are invested in global corporate bonds including the UK – top holdings include bonds issued by companies such as Transdigm, which produces aerospace components and Kenan Advantage, the tank truck transporter. It also invests around 4% in money markets.
Robeco High Yield Bond
This Robeco High Yield Bond fund steers clear of lower-rated end of the credit spectrum, which could make it a decent option for those dipping a toe into the riskier end of the bond sector for the first time. Its top holdings include 10-year US government bonds and debt issued by companies with a strong balance sheet such as Fortune 500 company Tenneco.
The fund achieves a coveted Gold rating from Morningstar analysts because of its below-average fees and strong performance: it has outperformed peers and its index consistently, producing annualised returns of 3.8% over five-years and is up 8.1% year to date.
Morningstar analyst Jeroen Siecker rates the highly experienced manager duo of Sander Bus and Roeland Moraal, who have worked together on the fund since 2003. Siecker says: "The experience of the management and analyst teams is a key driver of our conviction here. In addition, we value the fact that the managers are personally invested in the funds they manage, which helps align their interests with investors."
However, Siecke points out that the only drawback is that assets under management have grown to a hefty £8.1 billion, which could lead to problems in a more illiquid market such as high-yield bonds.
M&G Global Floating Rate High Yield
Low duration and a bias towards senior secured debt make the Bronze-rated M&G Global Floating Rate High Yield a somewhat more defensive option than many conventional high-yield bond funds.
However, the portfolio does focus on notes issued by companies with lower credit ratings, which means a greater default risk but also a higher coupon. Floating rate bonds have a variable interest rate, meaning the coupon you receive from the investment will change over time.
The plus side of this approach is that interest rates rise, the coupons are automatically adjusted upwards - however, the coupon will be cut if rates fall.
The fund is run by James Tomlins with deputy manager Stefan Isaacs, both of whom have established a good track record across a number of high-yield funds. This fund has returned 4.8% year to date and produced annualised returns of 2.7% over five years; it yields 3.8%.
The fund has the flexibility to invest across the globe and holds the debt of Spanish casino operator Cirsa and debt management company Cabot Financial among others.
Morningstar analyst Louise Babin says the fund “is unique within its peer group and emulates exposure to the loans market where income is typically linked to the prevailing interest rate". However, investors must be prepared to pay higher fees for the defensive characteristics the fund offers; its ongoing charge is higher than many of its peers at 0.83%.
