Are hedge funds just a portfolio sweetener or an asset class to be toasted for many years to come? Elizabeth Cripps investigates the asset allocation trends of the top six private banks handling the wealth of Europe’s high net worth individuals

Market growth in 2004 set to top last year’s record-setting levels of issuance.

In 2003, the high yield market had a record amount of new issuance as 515 deals priced for a total of $141.1bn (e117bn) in proceeds, according to Merrill Lynch index data. The previous record of new issuance was in 1998, which experienced a sum of $140.9bn.

However, issuance in 2004 through March 31 is on pace to break last year’s record as $46.3bn of new issuance has priced in the first quarter. According to Moody’s Investors Service, the high yield market has grown in size from $452.1bn in 1998 to approximately $695.2bn at the end of March 2004, representing nearly 54 per cent growth. Incidentally, high yield bonds as a percentage of outstanding corporate bonds represented 17.8 per cent on March 31, 2004, according to Moody’s.

A ‘rollercoaster’ time, maybe, but faith in high dividend yielding stocks remains strong since 2003.

The year 2003 was a turbulent one for investors in European equities. The Iraq war, and concerns about geopolitical risks, weighed heavily on the markets in the first few months of the year. Between the beginning of 2003 and 12 March, the MSCI Europe index lost nearly 20 per cent of its value. It then proceeded to recoup most of those losses in the following two months, and ended the year up nearly 16 per cent. A bit of a roller-coaster ride!

As was the case with 2001 and 2002, the divergence in performance between the best and worst performing stocks was large. However, in 2003 it was the high beta end of the market that performed the best.

High yield bonds tend to conjure up images of the boom and bust 1980s, but the fundamentals for this demonised asset class are currently positive.

The junk bond – also referred to as high yield or speculative grade – market has undergone dramatic swings in investor perception from the early 1980s under Michael Milken, the junk bond market pioneer, to the telecom bubble in 2001 and finally to the large inflows of investments seen in 2003.

During these swings, investor thoughts have ranged from thinking junk bonds offered no risk to believing they were created by the devil. This wide divergence in perceptions reflects a misunderstanding of high yield by a majority of both professional and individual investors.

Asset allocators must examine how closely a fund is able to replicate its index before choosing ETFs, writes Simon Hildrey

Cheap mid-cap stocks

Power Combination: pan-European equities