Fund buyer split on high yield bonds

Investors are in disagreement about whether high yield bonds are a good buy now. A quarter of European fund buyers plan to increase their allocation in the next 12 months, but an almost equally big share of them intend to decrease exposure. Fund flows have also been capricious of late.

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PA Europe

One of the core solutions Gadsby uses is the Nordea European High Yield Fund. “It has a bias to senior-secured debt with 40% of the portfolio invested in this type of securities, while the benchmark only has a 20% allocation.

Or are equities the better buy?

However, not everyone believes high yield bonds are worth buying now. “We have been underweight high yield bonds since January 2014 because we believed the spreads were too low

to compensate for the extra risk,” says José Luis Borges, head of institutional portfolios at BPI Gestao de Activos.

So Borges and his colleagues decided to use their risk budget for equities instead. But high yield bond spreads have widened significantly since the start of the year, so hasn’t this helped to change their stance?

“It’s true that there is better value now,” says Borges. “But the market is illiquid and we think equities are still the better choice.” However, he has some exposure to high yield. “But this is only a small allocation to some individual Portuguese bonds.” And it is not even a deliberate choice for high yield. “Almost all Portuguese bonds are classified as high yield because Portugal doesn’t have an investment-grade rating”, he explains.