Here is the new look for high-yield bonds

There has been a lot of talk about this for quite some time now. High-yield securities, i.e. high-yield bonds, have long been something of a taboo because they almost exclusively conjured up the image of an extremely risky investment. Not that in many cases it isn't, however, according to an increasing number of managers, this asset class, which was able to offer attractive returns, has over time no longer become a component to be looked at with mistrust, but rather an element to be included in the portfolio, albeit in a residual manner with respect to overall planning (the choice always depends on the characteristics of the investor and his capital).

Obviously, for these securities to be able to offer higher returns than other bonds with high creditworthiness, they involve high levels of risk, including the possibility of issuer default. It is therefore crucial to carefully assess the investor's risk profile and investment time horizon. As a general rule, however, it is better to use ad hoc instruments such as ETFs and mutual funds to enter this world; do-it-yourself is best left to those who are truly experts in the field and have high financial resources.

But cutting to the chase, why do managers believe in high-yield bonds? "A strategic portfolio allocation to high-yield corporate debt is always a good investment alternative if we reason with a long-term horizon," explains Antonella Manganelli, managing director of investments at Payden & Rygel Italia. "In recent years we have had very attractive yields to maturity (between 9% and 7% in dollars), which have also cushioned any capital losses, giving good total returns. At the moment we focus on the higher quality BB/B range, because we think risk-adjusted returns on securities with CCC or lower creditworthiness historically have been suboptimal. Globally, companies from both Developed and Emerging Markets present attractive opportunities. Finally, from a valuation perspective, European stocks have recently shown greater resilience than US stocks.

Another question is whether they are as risky as in the past. "European high yield has made a lot of progress since the 1990s," says Angelina Chueh, Client Portfolio Manager, Fixed Income at Columbia Threadneedle Investments, "We have seen a shift from being a marginal asset class, made up of low-quality, highly speculative issuers, to an asset class with greater depth and breadth, including top companies such as Renault, Marks and Spencer, Air France, Terna, Vodafone and JaguarLand Rover. Since 1999, the market has grown 27-fold in value terms, while the number of issuers has grown eight-fold. The market used to have 11 sectors with a 50% share for telecommunications and media alone (it is now at 18%); today it offers 18 sectors, the same as the investment grade market, with additions including utilities, banks and financial services. The credit quality of the underlying securities has improved dramatically over the years, from an initial average of single B to the current average of BB-'.

The market is therefore more diversified today and offers active managers more freedom to benefit from both tactical and thematic positive drivers and investors, more opportunities for credit selection, but it is certainly not a market for everyone.