Donald Phillips

Moving the target

Donald Phillips

The recently launched Liontrust GF High Yield Bond Fund is setting a new performance target not based on the traditional high yield indices.

We appreciate, of course, that investors find reference to traditional benchmarks useful, mainly for communication purposes, but after that, we find indices, from an investment perspective, aren’t particularly useful.

We run a relatively concentrated portfolio compared to our peers and happily choose to have little or no holdings in particular sectors. Good credit work combined with running a relatively concentrated portfolio feeds into long investment holding periods, thereby reducing the relatively high trading costs associated with high yield corporate bonds.

Potential high yield investors might be tempted to employ a passive strategy – managers have for the most part tended to underperform their benchmarks over longer periods. However, savers cannot practicably invest in the typical high yield indices, such as the BAML ICE range.

One of the main reasons for this is the natural state of turnover in these indices combined with the aforementioned cost of trading. The index data have frictionless trading, managers do not.

ETFs, a popular ‘passive’ option for investors, have a similar problem. Compared to the traditional indices used by the high yield market, ETFs don’t get even close to their long-term performance. Over the last five years for example, the iShares Global High Yield ETF has produced returns of 3.8% a year compared to 5.6% for the BAML Global High Yield index (Source: iShares, to 17.07.18).

ETFs sensibly compare their own performance against a customised benchmark that cherry picks liquidity. Don’t get me wrong, I think this is a sensible thing for them to do. The advertised relative performance looks to be doing a good job, but the comparison with active managers on relative performance is really comparing the apple with the proverbial pear.

We will provide clients with management information based on the traditional indices. In terms of investment performance, however, our target is to outperform the iShares Global High Yield ETF by 1.5% a year net of fees over the long term.


Key Risks & Disclaimer

Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

This blog 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.  It contains information and analysis that 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 of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust.

Tuesday, July 24, 2018, 9:36 AM