With the global high yield market having a yield of close to 7%, Liontrust’s Donald Phillips discusses where to find the current opportunities and the potential risks for investors.
In the first half of the year the high yield market produced a decent 4.5% return, yields started the year a little above 7% on average, and now start the second half slightly below 7%. Long-term returns in High Yield have historically been well predicted by today’s starting yield. And right now, that yield at close to 7% remains attractive by historical standards.
It’s true that credit spreads, the additional yield credit earns above government bonds, have narrowed since 2022—a year shaped by the reaction to a huge increase in interest rates. Spreads widened sharply during that period, particularly in Europe. Since then, they’ve retraced, with a short-lived tariff wobble earlier this year. Spread levels are now modest versus long-term averages.
But we think it’s important to focus on the fact we are not paid in spread—we are paid in yield. And today’s starting yield continues to offer a solid opportunity to generate attractive income.
One shift we’ve seen over the first half of this year is the reduction in the spread premium that European High Yield offers over its US counterpart. That differential had made Europe relatively more attractive for a time—but it has now largely closed. In response, we’ve increased our allocation to US high yield.
When it comes to capital appreciation, we believe the outlook is likely somewhat limited. This isn’t a market primed for widespread capital gains from cyclical or thematic recovery stories. Many of the bonds offering higher spreads are clustered in sectors like cable, telecoms, satellite, parts of the energy sector. They are typically facing structural challenges—like obsolescence, over-capacity and weak pricing power. These are often a little binary —rather than temporarily undervalued. It’s far from clear that these are areas of genuine opportunity.
We believe the real strength of the high yield market today lies in finding idiosyncrasy amongst resilient companies—businesses with sound fundamentals, stable cash flow, and disciplined capital structures. They might not be blue-chip giants, but often stock market listed with sizeable market caps, and through servicing their debt are capable of delivering to us consistent income with manageable risk.
Our strategy is selective. We don’t try to replicate the index, which often leads to hidden concentrations and unintended risk. Instead, we build true diversification by deliberately avoiding thematic clustering.
A clear example of this discipline is our minimal exposure to triple CCC-rated, or the lower end of the quality spectrum— which is today less than 2% of the portfolio, and about as low a proportion as we’ve ever had. That’s a reflection of how we see risk: it’s not about chasing the highest-yielding or illiquid parts of the market, it’s about protecting capital and avoiding crystallisation of losses.
And importantly, we think the macro environment supports this approach. Many developed economies are now settling into a slower, anaemic growth phase. While that may be a challenging backdrop for equities and the most indebted companies — it’s perfectly workable for the higher quality end of High Yield credit. For resilient companies with predictable cash flows, a low-growth world can still be a productive one.
Over time, high yield has delivered equity-like returns with far less volatility and drawdown risk. And looking ahead, with limited capital appreciation likely in the riskiest parts of the market, we believe the best way to generate value is to harvest yield carefully, avoid mistakes, and stay disciplined.
KEY RISKS
Past performance does not predict future returns. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.
The single strategy funds managed by the Multi-Asset team:
- May consider environmental, social and governance ("ESG") characteristics of issuers when selecting investments for the Funds.
- May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund.
- Holds Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay.
- May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings.
- May, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. The use of derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
- May invest in emerging markets which carries a higher risk than investment in more developed countries. This may result in higher volatility and larger drops in the value of the funds over the short term.
- May target an absolute return. There is no guarantee that an absolute return will be generated over the time period stated in the fund objective or any other time period.
The risks detailed above are reflective of the full range of single strategy funds managed by the Multi-Asset team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
DISCLAIMER
This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.
It should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.
This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
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