As of mid-June 2022, the Liontrust GF High Yield Bond Fund’s gross return to maturity was now over 10% for the dollar investor. This means a return of over 7% for investors from Switzerland. Despite the higher volatility than other fixed income segments that we’ve seen for some time, we like the high yield.
One of the main reasons we prefer high-yield bonds is their internal income factor. This allows them to be resilient when capital-only performance is challenged during times of stress. We’re seeing it today, with high yields around -11% year-to-date, while European government bonds are around -15% and European equities are around -25% (source: Bloomberg, as of 06/15/22).
We are not declaring a market bottom, but we believe that high yields represent a good long-term opportunity and that this asset class is destined to recover. As the market stabilizes and fully opens up to new issuance, we will see coupons rise: companies will issue bonds at higher yields than we have seen in recent years. As an example, say the average coupon is expected to rise to 6% next year. In a $2,500 billion market, that’s $12.5 billion in additional revenue.
Meanwhile, there is significant capital growth potential. The average price of a spot bond fell to 86% (the vast majority of bonds mature at 100% or more), compared to an average of 104% at the same time last year. If we take a more pessimistic view, defaults can negate this expected capital increase (convergence to par). However, when BB and B- rated bonds are taken into account (excluding CCC issues, which present the highest risk of default), the average price is still 87.5%, compared to 106% a year ago.
This is certainly a difficult time to be investing in any asset and it is completely impossible to know whether asset values will rise or fall over the next three to six months. But in the longer term, we believe that capital gains in a high yield market will be a key feature of this asset class (as it always has been) and that investors will benefit from some growth in their capital over time.
Show article disclaimer
Past performance is not a reliable indicator of future performance. The value of the investment and the income from it can either decrease or increase, and this is not guaranteed. You will probably get back less than your initial investment.
Issuance of units/shares of Liontrust funds may be subject to entry fees, which will affect the cost of investment, especially in the short term. Investments should always be considered long-term.
Any investment in the GF High Yield Bond Fund is exposed to foreign currencies and may fluctuate in value due to changes in currency exchange rates. The bond’s value will decline if the issuer is unable to repay its debt or if its credit rating is downgraded. As a rule, the higher the perceived credit risk of the issuer, the higher the interest rate. Bond markets may be subject to reduced liquidity. The Fund may invest in emerging/fragile currencies and derivative financial instruments, which may increase volatility. The Fund may invest in derivatives. The use of derivatives can create leverage or financial leverage. A relatively small change in the value of the underlying asset of the derivative may have a greater impact, either positive or negative, on the value of the fund than if the underlying were held instead.
Non-UK individuals: This document is issued by Liontrust International (Luxembourg) SA, a Luxembourg public limited liability company registered on 14 October 2019, authorized and regulated as a management company in Luxembourg by the Commission for the Supervision of the Financial Sector (“CSSF”). has its registered office at 18, Val Sainte Croix, L-1370 Luxembourg, Grand Duchy of Luxembourg and is registered in the Luxembourg Trade and Companies Register under number B.238295. UK Individuals: A document issued by Liontrust Fund Partners LLP (2 Savoy Court, London WC2R 0EZ), which is authorized and regulated in the UK by the Financial Conduct Authority (FRN 518165) to carry out regulated investment activities. This document is an advertising message. Before investing, you should read the relevant prospectus and Key Investor Information Document (KIID), which contain full information about the product, including the investment costs and risks involved. These documents can be obtained free of charge from www.liontrust.eu or directly from Liontrust. We encourage you to always do your own investment research and, if you are not a professional investor, consult with a licensed financial advisor to determine whether such an investment is appropriate for your personal circumstances. This material should not be construed as investment advice with respect to any product or security mentioned, an offer to buy or sell units or shares of the funds mentioned, or a solicitation to buy securities of any company or investment product. Example values are provided for general information only to represent our investment philosophy. The investments referred to in this document relate to fund units and not directly to the underlying assets. This document contains information and analysis believed to be accurate at the time of publication, but is subject to change without notice. Although the contents of this document have been compiled with care, Liontrust makes no warranties, express or implied, as to its accuracy or completeness, including external sources (which may have been used) that have not been verified. It may not be copied, transmitted, reproduced, communicated or distributed in any form, whether by facsimile, electronic mail, oral or otherwise, in whole or in part, without the express prior written consent of Liontrust.