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High yield and equities – in the same classroom?

Equities and high yield bonds follow each other wherever they go, both when it comes to fund flows and returns, as we discussed last week on this site. The Barclays Global High Yield Index even followed stocks down on Monday in the aftermath of the breakdown of talks between Greece and its creditors. So, if…


PA Europe

Returns of high yield bonds and (especially European) equities are inextricably linked, so one might indeed make a case for putting high yield bonds into your equity bucket. And that’s exactly what Rico Bosma, a fund analyst for Wealth Management Partners in the Netherlands, does. He uses high yield bonds as a sort of satellite within his equity portfolio. “We always use high yield as part of our equity exposure. The returns are comparable to those from equities, with a bit more cushion because of the coupon,” he says.

However, not all fund selectors are sharing Bosma’s logic. “High yield is not part of our equity allocation,” says Arild Orgland, managing partner of the Norwegian wealth manager Industrifinans. “However, high yield bonds and equity have a similar risk profile, so we assume a more equity-like risk for high yield when we make a risk assessment of a portfolio.”

For Orgland, this implies he will reduce equity exposure when buying high yield in order to balance the total risk of the portfolio. “We are now overweight equities, but would probably reduce equities if we increase high yield to keep the risk profile intact,” he says.

Despite the strong correlation between equities and high yield bonds, Claes Roepstorff, head of balanced products and portfolio solutions at Nordea in Copenhagen, sees the two as absolutely different beasts. “For me high yield is part of fixed income, because it’s about credit risk,” he says. “I think there’s so much correlation between high yield and equities now because they stand out in attractiveness as a consequence of the low yield environment,” the Dane adds.