Wellington Global High Yield Bond Fund has been added to the Direct Investment Service Preferred List following the recent availability of the fund through Charles Stanley Direct. It fills a gap on the list in the area of high yield bonds since the removal of Royal London Sterling Strategic Bond in November 2019.
This fund is broader than UK or pan-European alternatives, taking a global approach to the asset class. We believe this is important in giving managers the largest possible universe to select from. In order that capital and income is not subject to currency movements, the unit class we have selected is currency hedged.
Why high yield bonds?
High yield bonds are publicly traded debt securities issued by companies that have a credit rating below ‘investment grade’ as rated by major credit rating agencies. Generally, bonds rated BBB or better are deemed to be of investment grade quality; BB+ and below are classed as High Yield. A lower credit rating reflects a
greater chance of the bond issuer defaulting. – i.e., not receiving promised income payments and/or capital back This could be because the company is highly indebted, operates in a more unpredictable or cyclical industry, is private or is small in scale.
The greater ‘default risk’ of high yield debt means investors require greater compensation to invest in the form of a higher income yield or ‘coupon’. It also means they aren’t usually willing to lend for as long and bonds have shorter average maturities, typically 7-10 years.
The performance of an individual bond is determined by operational performance of the issuer, as well as the macroeconomic backdrop. If the market loses confidence in the issuers’ ability to continue servicing its debt, the bonds will trade below their ‘par’ value (that they are issued at) and ultimately could default. This doesn’t mean bondholders lose all their money; usually they can either restructure the debt with the company, or sell down the company assets and see how much they can recover.
High Yield bonds are much less sensitive to interest rate movements than higher quality bonds because of their shorter maturities and higher coupons. Conversely, they are more sensitive to the economic backdrop. This, and their higher expected return and volatility means they are considered a risk asset, demonstrated by a positive correlation to global equities, albeit the significant income they generate provides a differentiated return.
Fund objective and philosophy
Wellington believe High Yield is an ‘inefficient’ asset class where fundamental research can add value. They suggest this is because the market as a whole doesn’t fully appreciate that default risk and volatility increase exponentially as quality decreases. Instead, market participants ‘stretch’ for yield in a linear manner where risks are not justified by potential return.
This fund seeks to exploit this inefficiency and beat the broader market by focusing on downside protection, maintaining a slightly defensive bias at most times. However, the high yield market serially repeats a cycle of boom and bust, so the manager aims to flex this bias by opportunistically upping risk in periods of market stress.
Chris Jones is the lead portfolio manager and has been managing the strategy since its inception in December 2006, having begun his career at Wellington in 1994. Jones is supported by Michael Hong, Konstantin Leidman, David Marshak and Jeffrey Heuer. In total, Wellington has 30 professionals located in Boston and London dedicated to Global High Yield investment management which includes 14 dedicated high yield analysts.
The fund has solid strong long-term track record, which has all been under the guidance of Chris Jones, although past performance is not a guide to the future. Returns for the asset class were derailed by the events of early 2020, albeit the fund was more defensively positioned at that point and subsequently reaped the rewards from adding to risk levels as the market bounced back.
We believe the fund should be able to perform well in relative terms in both up and down markets. At various times in the cycle, the manager will adjust risk consistent according to analysis of the economic cycle. Historically, the strategy has delivered the most value in periods of weak returns for high yield (2008, 2011, 2014, and 2015). Additionally, market environments where idiosyncratic risk is the primary driver of performance, such as 2017 and 2019, has tended to be favourable. However, strong lower-quality led risk rallies (for instance 2009 and 2016) have tended to present a headwind in relative terms.
High yield debt is a complex asset class where thorough research combined with prudent risk management can add significant value. There can be lots of pitfalls with the biggest components of indices typically the companies with the largest amount of debt rather than any other determinant of size. We therefore prefer an active approach as opposed to a passive strategy of ‘buying the market’.
In this fund we expect the bulk of extra returns to be generated from good credit selection, with perhaps a bit of value added from the ability to adjust risk tactically. We view it as a differentiated fund that provides well-diversified core exposure to the high yield market. Charges are also competitive. We are pleased to welcome it to the Direct Investment Service Preferred List, our curated list of preferred investments for new investment across the major sectors.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
Wellington Global High Yield Bond Fund – added to the Preferred List
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