High yield sector concentration risk
| GBP high yield | US high yield | EUR high yield | |
| Retail | 26% | 6% | 4% |
Largest high yield sector concentrations
| GBP high yield | US high yield | EUR high yield |
| Retail 26% | Energy 12% | Banking 13% |
| Telecommunications 12% | Media 9% | Telecommunications 12% |
| Utility 10% | Leisure 8% | Automative 10% |
Source: Mirabaud Asset Management, ICE BAML
The short-duration temptation
With short-dated investments now offering appealing yields, it can be tempting to park your portfolio at the short end of the curve. This is a valid strategy for capital preservation, but it does leave you exposed to re-investment risk and missing market upside.
When a rate-hiking cycle comes to an end, the rally in high-quality, longer-duration assets can be considerable, and in 2019 delivered returns above equities despite being much lower risk.
High-quality fixed income has a lot of downside protection, giving it an asymmetric return profile that should do well when the cycle turns.
When the pivot comes, potential returns could be significant.
| 8/11/18 YTW | 8/11/19 YTW | 12-month return | |
| UST 1yr | 2.74 | 1.57 | 2.7 |
| UST 2yr | 2.97 | 1.67 | 3.7 |
| US 1-3yr IG | 3.6 | 2.24 | 5.7 |
| Global HY | 6.47 | 5.56 | 8.5 |
| US IG | 4.38 | 3.05 | 13.8 |
| S&P | 2806 | 3093 | 12.3 |
Source: Mirabaud Asset Management, ICE BAML, Bloomberg
The international opportunity set
While holding only UK fixed income introduces what we believe to be unnecessary concentration risk into a portfolio, and a short-duration bias could have a negative impact when the cycle turns, no market is devoid of opportunities.
Rigorous bottom-up credit analysis should bring some UK gems to the surface and provide protection against interest-rate and default risk, which is elevated by the prevalence of banks and real estate in UK investment grade and retail in the high yield market.
These can be complemented by tactical exposures to Europe and the US.
We believe flexibility between geographies can capture the different speeds of economies across the globe, with consensus forecast that the US and Europe could see that classic 'hockey stick' recovery that would be positive for credit spreads, compared to the UK, which is expected to be mired in low growth for some time.
In Europe, we are currently seeing some interesting opportunities in high yield – a market that was unduly punished in 2022 as the peak fear regarding gas prices drove spreads out.
Drilling down in sectors, we see long-term structural growth in European telecoms infrastructure, and more short-term opportunities in German manufacturing, which is set to benefit from momentum around the China reopening trade.
In the US, cruise liners and companies associated with the re-opening travel theme continue to perform well, enjoying elevated bookings and strong demand.
Currency cost myth-busting
Outperforming is never easy and we believe in having as many tools at your disposal as possible to optimise risk-adjusted returns.
Including geographic flexibility alongside asset allocation, duration, credit quality and sector gives you a fifth lever to pull on as market direction shifts.
Currency risk is an element that can deter investors from expanding their geographic view. It is true currency moves can be bigger than returns at times, but the perception that it is prohibitively expensive to hedge your currency risk back to sterling is not accurate.
