HY appetite to stay strong

Institutional investors expect appetite for global high-yield to remain strong over the next five years as investors continue to favour the asset class’s diversification benefits, falling default rates and credit fundamentals.

Research by NN Investment Partners shows 43 percent of respondents expect institutional investors to increase allocation to European high-yield debt over the next five years – over twice the 21 percent who expect there to be a decrease.

Investors see diversification as the most attractive attribute of high-yield debt, according to 64 percent of respondents, while 37 percent pointed to stable/falling default rates in the sector and 36 percent cited good credit fundamentals.

Over a third (35 percent) said valuations currently justified the extra risk inherent in the high-yield sector. Only 10 percent said high-yield was not attractive at present.

The eurozone offers better valuations for high-yield bonds than any other region in the world, according to the research: 27 percent of respondents rated eurozone valuations as strong or very strong while the US was cited by 22 percent, the UK and Japan by 18 percent each and Asia ex-Japan by 16 percent. Valuations were seen as the most attractive attribute of European high-yield bonds overall, with nearly two in five (38 percent) of institutional investors saying this makes them significantly attractive versus any other bonds, justifying the additional risk. Another 26 percent of investors said falling default rates in Europe were supportive.

Tim Dowling, head of credit investments and lead portfolio manager global high-yield, at NN Investment Partners, commented: “Investors have been attracted to high-yield bonds in recent years not just because it has offered a cushion against falling interest rates but also the diversification benefits across geographic regions and industrial sectors. Improvements in the global economy have provided further support by reducing default risks and enhancing fundamentals more generally. ECB monetary policy will support eurozone bonds but the sheer diversity of the high-yield sector means there are investment opportunities around the world.

“But it is still a challenging sector and will continue to be so: our research showed that 52 percent of institutional investors thought that while some high-yield fund managers will deal with an environment of rising interest rates some will struggle and only 2 percent of respondents had total confidence in their abilities. Investors need to partner with asset managers who have the experience and processes in place to analyse global markets and pinpoint the opportunities and risks.”