Only a year ago, when the oil price had just started its unprecedented descent, the asset class was hugely unpopular, with sellers clearly outstripping buyers. Now the picture is very different: some 38% of Switzerland’s fund buyers plan to buy more high-yield bonds, while there are almost no bears around anymore. Finland is the only country where appetite for the asset class is even greater.
When our researcher visited Zurich this autumn, local fund selectors told him they are adding to their high-yield bond positions simply because they can’t anymore find satisfactory returns in the investment-grade bond space. It’s almost impossible to find an investor in Switzerland who wants to increase exposure to government bonds, though perhaps this shouldn’t be a surprise: Swiss 10-year government bonds trade at -0.2% at the moment.
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Omar Gadsby, head of fixed income fund selection at Credit Suisse Private Banking in Zurich, has a simple, albeit quite demanding base criterion for bond investing: “For me to invest in it, the yield on a bond must be greater than its duration.” Indeed, in the investment grade sphere this is quite an impossible mission to find such a security. And Gadsby is as good as his word: he has turned to high-yield bonds.
Short duration
“Three years ago, you could have achieved a return of 4% with only investment grade bonds. Now, you need a 90% exposure to high yield to realise that,” says Gadsby. “If you don’t want such a high allocation to high yield, you need to get extra yield through carry trades.”
Gadsby is also a fan of long/short bond funds. Moreover, he demands from his bond managers that they have a mandate to short. This is not an attitude shared generally in Switzerland. While long/short equity funds have quite a lot of fans, this is not the case for long/short bonds: though one in five interviewees plan to increase exposure, the majority are not invested in the asset class.
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So instead of looking for a short component in their portfolios to reduce the higher risk associated with an overweight to non-investment grade bonds, the Swiss have reduced the duration of their bond portfolios: in the high yield bond space, short-duration is the rule rather than the exception.
Emerging market debt may offer even higher yields, but for the Swiss the asset class is anathema at the moment. About half of interviewees are not invested at all, and buyers are few and far between.
