Has the outflow from high yield been overplayed?

Natasha Browne asks whether negative reaction to the outflow from US high yield was exaggerated


Natasha Browne asks whether negative reaction to the outflow from US high yield was exaggerated

There has been a lot of bluster made of the recent outflow from high yield. Data from Lipper showed $7.1bn (£4.2bn) was pulled out of US high yield and exchange-traded funds (ETFs) for the week ending 6 August, but should pension funds be concerned?

Kames Capital investment manager Stephen Baines thinks not. He says the withdrawal was mainly sparked by comments from Federal Reserve chairman Janet Yellon, who suggested parts of the market were overvalued.

"Investors, primarily via ETFs, withdrew money from the high yield bond market. And because ETFs directly replicate an underlying index they had to sell in line with those outflows," he says.

"We haven't seen a meaningful shift at the portfolio manager level to build cash balances or to reduce risk in general. We've not seen any meaningful deterioration in financial conditions that would make us less optimistic about the fundamentals for high yield."

Hermes head of credit Fraser Lundie (pictured) believes the outflow has provided a marginal buying opportunity because all of the reasons to own credit have remained the same. He says: "People are maybe confusing big outflow numbers with performance because actually the market hasn't really sold off in any significant way."

According to Lundie, the market is only around 1.5% off its peak and returns are steady at between 5% and 6% year-to-date. He adds: "There have been big headlines about the notional number of dollars that have left the asset class but that doesn't necessarily translate into poor returns. From a pensions point of view, what happens over a three or four week horizon is not really of much concern here."

M&G Investments investment specialist David Parsons points out that it was retail investors who led the outflow. He says: "Certainly our sense is that it's not necessarily institutional money that's exiting the US high yield market. But any movement in the US high yield market, given that it constitutes approximately 80% of the global high yield market, is obviously going to have a knock-on affect into Europe."

Parsons thinks the market is slightly overextended but he is more worried about pension fund vulnerability to difficult paper work. He says: "There's been an increase in the last couple of years of new issuers coming to the market and often at very short notice. We're concerned that some investors don't actually spend enough time looking at the covenant and thinking about the documentation.

"We've seen instances over the last 12 months where documentation has been perhaps less investor friendly than one might have historically seen. From that perspective, it requires doing a lot of due diligence on these issues and not just buying on the rating or the yield."

Principal Global Fixed Income senior product specialist Mark Cernicky remains upbeat about high yield and says it experienced a good recovery from the ‘trapper tantrum' of 2013. Outflows were even higher then, and yields reached 7%. Cernicky says: "Given that high yield fundamentals remain solid, it seems likely that markets will also recover from this latest sell-off." The US market has already showed signs of healing with Lipper data showing inflows were £680m for the week ending 13 August.

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