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High yield fund flows emerge from the ground

The spike in net inflows coincides with renewed appetite among fund selectors for the asset class.The share of fund buyers telling us they will increase allocation to high yield bonds in the next 12 months almost doubled from 12% in December to 23% in late March.  There seem to be several reasons for the uptick in interest.…

The spike in net inflows coincides with renewed appetite among fund selectors for the asset class.The share of fund buyers telling us they will increase allocation to high yield bonds in the next 12 months almost doubled from 12% in December to 23% in late March. 

There seem to be several reasons for the uptick in interest. The first one is a rather simple one: in an investment universe where almost all assets are looking (much) more expensive than a year ago, this isn’t so much the case for high yield bonds. The Barclays Global High Yield Index,

 

priced in dollars, delivered a return of -1.46% in the 12 months to the 17th of April. So the euro-based return of 27% can be entirely attributed to the devaluation of the euro versus the dollar.

Dressed-up equity

A second reason for the popularity of high yield bonds is their correlation with equity. With quite some investors reaching their maximum allocation to equities, some of them see investing in high yield bonds as a way to gain additional equity exposure through fixed income.

“We recently took a position in high yield bonds as a part of our equity allocation,” says Rico Bosma, a fund analyst for Wealth Management Partners in the Netherlands.

 

A third reason for the renewed interest in high yield is the spread with government bonds, which has widened again over the past year. In their hunt for yield, some investors are therefore swapping part of their government bond exposure with riskier, higher-yielding assets. This trend is most pronounced in Spain, where 40% of fund selectors want to increase their allocation to high yield.

Meanwhile, emerging market debt and investment grade corporate bonds are also witnessing an increase in inflows (see chart above). The latter have even set a new all-time record in monthly net inflows, which only narrowly missed the €6bn mark in February. 

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