Donald Phillips

The pitfalls of being too benchmark aware

Donald Phillips

In 2014, when spreads on high yield bonds got to very tight levels, I remember dipping my toes in higher yielding emerging market-related bonds. The experience taught me that, for bond investing, emerging markets are different. The pace of macro-economic deterioration can be so quick that it quickly swamps any idiosyncratic qualities the underlying companies may have.


In designing the Liontrust GF High Yield Bond Fund, we have been very clear that, although we realise investors find benchmarks useful as reference points, investing relative to a benchmark is fraught with danger. This is particularly so if and when ‘active’ managers may think they are expressing no view by being ‘neutral’ against a bond issuer, sector or geography.


The pitfalls of being too benchmark aware will currently be felt by anyone managing a global high yield fund with exposure to certain emerging market countries. Turkey, for example, had on its own accounted for close to 90% of the (negative) return of the global high yield market from the start to halfway through August (From 1 August 2018 to close of 14 August 2018). Turkey is less than 2% of the index (ICE BAML Global HY Index).


Forgive me for the short-termism. By the end of the month, Turkish bonds could have rallied back to Par, causing delight for the managers who were earlier feeling the heat just as the summer heatwave was cooling off. However, in a world of asymmetric risk (bonds can drop 100% but upside is capped), having the conviction to hold on when a bond, or group of bonds, have dropped 40% to 50% in price is difficult.


This is amplified if it is part of a thematic sell-off caused by issues where you do not own any particular insight. This is not a great position to be in to make good investment decisions. An advantage of our “pure” high yield style, combined with no need to adhere to an index, is that we can readily choose to avoid these thematic traps. In contrast, global high yield ETFs, for example, may have delivered negative returns over the past couple of months.


A similar article could have been written related to Energy bonds during a week in the middle of the oil price crash in late 2014 and Bank bonds during the Global Financial Crisis. For fund managers, it is not a case of having a crystal ball telling you what and when the next thematic crash will be, rather it is about managing thematic risks sensibly and appropriately for investors. After all, this is what we’re being paid to do.

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Key Risks 

Past performance is not a guide to future performance. Do remember that the value of an investment and the 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. Investment in Funds managed by the Global Fixed Income team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Bond markets may be subject to reduced liquidity. The Funds may invest in emerging markets/soft currencies and in financial derivative instruments, both of which may have the effect of increasing volatility.


The information and opinions provided 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. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing. 

Friday, August 17, 2018, 11:37 AM