Fixed income investors can find more opportunities in high yield (HY) assets including corporate bonds, emerging market (EM) hard currency bonds, and EM local currency bonds when building their portfolios in the second half of 2019.
The reason is a portfolio made up of these asset classes will have access to a broad and diverse investment universe, steady and consistent returns, as well as good liquidity.
“If you are just to focus on one part of the high yield universe, in some years the difference in yields between HY corporate bonds, emerging market debt hard currency sovereign bonds, and emerging market local currency bonds can be significant. In some years it can be as high as 37% between the best and the worst. On average over the last 15 years, it’s been 12%,” says Jeremy Cunningham, investment director for Fixed Income at the Capital International Group.
Although better known as an equities house, Capital Group manages US$325 billion in fixed income assets out of a total assets under management of US$1.9 trillion.
Capital Group’s flagship fixed income, known as the “global high income opportunities” has a 20-year track record and a distribution yield of 7.7% on an annualized basis over the past 10 years.
“Having a diversified allocation across all these asset classes of the high yield universe allows for more diversification and a steady, consistent income. It’s a very broad, diversified investment universe and the reason why that is important is because high yield corporate bonds and emerging market debt perform very differently at different points in the cycle,” says Cunningham.
In terms of asset allocation, the strategy is overweight local currency EM debt particularly Sub-Saharan Africa, Brazil, Dominican Republic, Russia, and India.
In Sub-Saharan Africa, especially with countries like Nigeria, Ghana, and Kenya, the ongoing economic reforms arising from investments from China is pushing growth and strong fundamentals.
“But you have focused on the value of the bonds and the liquidity,” Cunningham says.
In India, the Capital Group has a presence in the onshore local currency market where it is invested in a non-benchmarked position. “Operationally we spent a lot of time getting set up to be able to invest in Indonesia and the reason being is because India is going through a very strategic economic reform,” says Cunningham.
“We do like Russia and the reason for that is while there are risks because of the sanctions, the actual economic policies that are being pursued are focused on achieving a more balanced economy. It’s very laser-focused on keeping inflation under control and reducing its dollar debt significantly. So we think it’s favorable from a fundamental perspective,” Cunningham says.