Finding the best picks in high yield bonds

Finding the best picks in high yield bonds

11-10-2016 | Insight

The high yield bonds market offers a unique set of opportunities in an environment of low interest rates, but you need to know where to look, says portfolio manager Sander Bus.

  • Sander  Bus
    Co-head Credit team

Speed read

  • Market for non-investment grade credits is vibrant and diverse
  • Being contrarian and unconstrained is important to avoid the losers
  • Regional disparity between US and Europe is a source of opportunities

The nature of the high yield market means it is more important to avoid the losers than pick the winners, requiring a contrarian and unconstrained approach, he says. This enables investors to get market-beating returns as global interest rates remain at, or close to, historical lows.

High yield bonds are those issued by companies with credit ratings below investment grade, meaning they carry higher risk than investment grade credits, but have higher returns to compensate for that risk. The companies issuing them tend to fall into one of three categories: they are relatively young and so don’t have established credit records; they are engaged in higher-risk industries such as oil exploration; or – and quite commonly – they operate in a more mature sector where they use leverage to create a more attractive return on their capital.

“The market offers an ever-expanding opportunity set as the kinds of companies that issue them differ greatly on a regional and sectoral level,” says Bus, who has been involved with our high yield fund since its inception in 1998 and is a leading authority on the asset class.

“High yield energy companies for example have different risk and reward metrics to those in the consumer goods sector, while there are big differences in corporate approach – including cultural attitudes to levels of leverage – between the US and Europe. This allows diversification across the high yield spectrum and means that we need to adopt a truly globalized approach to investing.”

‘Wobbles’ present opportunities

Buying the right bonds by using this kind of active approach is important, because the overall market is often affected by prevailing macroeconomic forces – sometimes irrationally. For example, 2016 saw a number of factors impacting sentiment for high yield (and other securities), from fears of a Chinese slowdown to the Brexit referendum vote. However, these ‘wobbles’ also present opportunities, particularly as economies become more dislocated due to different central bank policies, Bus says.

“Regional disparity between the US and Europe is an important source of opportunities for active investors like ourselves,” he says. “Rarely do economic cycles move in tandem, and these differences allow us to distinguish between the type of exposure that we like to take in any geographic area. The US economy, for example, is moving towards a later stage in its cycle compared to the Eurozone, with the Fed signaling its willingness to tighten monetary policy while the ECB continues to loosen.”

‘Rarely do economic cycles move in tandem’

“Currently, this is a reason for a more cautious stance towards US credits, particularly if the risk premium (spread) is not compensating for this. The issue is compounded by the fact that US companies currently tend to be more leveraged than those in Europe, where company managements tend to still have a strong recollection of the euro crisis era and remain more conservative in their attitude to taking on debt, including the issue of high yield bonds. As any investment carries risk, it is therefore vital to have a truly global approach in order to select the most compelling investment cases available to an investor.”

Bus says there can also be major regional differences within sectors, of which the financial industry is a prime example. “Many weaker banks are still recovering from the financial crisis, and certain Eurozone banks remain weak, overburdened with non-performing loans, as the 2016 Italian banking crisis revealed,” he says. “But there are plenty of exceptions – the recapitalization of EU banks has created a vibrant market for ‘hybrid’ bonds, and subsequently the subordinated paper issued by strong European banks is a highly attractive category.”

Don’t follow the herd

Bus says it is essential to be contrarian and don’t ‘follow the herd’. This may mean, for example, buying bonds in unfashionable sectors or areas, but with room for returns, without being constrained by borders. “We always prefer to be buying when others are selling, and selling when others are buying,” says Bus.

“And you need to establish whether an exogenous factor that prompts a selling spree actually affects the underlying fundamentals of investee companies. For example, high yield spreads were spooked by the Brexit vote, which sent most asset prices downwards, but it is important to step back and look at the valuations, technicals and fundamentals before rushing to judgement. For most high yield companies, whether or not the UK is in or out of the EU makes no difference to their business models, and investment should therefore be made according to facts, not sentiments.”

“The total return outlook is very positive for investors who are able to withstand day-to-day volatility – which high yield investors should be able to do anyway – and not be swayed by macroeconomic and/or sentiment factors that often have no bearing on the underlying securities.”

Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.


1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong. 

Please click “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree