Wealth managers continue to worry about defaults
After the bull run, the argument for risk reduction is strong, particularly as stocks too have enjoyed a good phase, and some wealth managers are far from sanguine about default rates at the speculative end of the market. “For clients who have had good fortune with high yield bonds, our advice would be to take some profit,” says Johan Jooste, portfolio strategist at Merrill Lynch Global Wealth Management. “The high yield default rate is now 12.5 per cent on an annualised basis. That means if double digit default rates persist for the length of the cycle then four to five out of every ten will go bust. Refinancing has not resolved the default problem, only delayed it. We expect a second wave of defaults in 2011-12. Many of those companies are badly managed and would have defaulted had it not been for refinancing, and we’re sceptical of their fundamental value. Essentially we concede there is yield, but we would not consider adding to holdings and would be careful not to overexpose.” Mr Jooste thinks much of the rally is a result of rivers of cash looking for a home after central bank intervention in February and March, and research concurs that the fund categories receiving the huge inflows are credit. High-yield bond funds led their peers in the last quarter with a return of around 13.4 per cent, according to Morningstar, consolidating gains of nearly 39 per cent on average in the first nine months of the year. But so far the chase has been all about beta and a subtle shift will be required to capturing alpha in the next phase of the cycle. Wealth managers are looking for asset managers that are not afraid to move away from index weightings, and possess a proven track record, intimate knowledge of the names and broad-based capacity. “High yield remains attractive, just not as attractive,” says Alex Barry, head of UK wholesale at JPMorgan Asset Management. “There is still scope in the sector, and exposure to this part of the market is attractive in yield terms and provides some diversification,” he explains. “In our marketplace some clients look to build their fixed interest exposure themselves; while others use a strategic bond manager who runs the asset allocation on their behalf’” says Mr Barry. “If investors are looking to invest in high yield bonds we suggest they look for managers who have the capability to analyse the full opportunity set, with a presence in the local markets in the US and Asia as well as Europe, just as you would look for capability across the globe in equity management,” he adds. “The rate of default has spiked, so the current need is for active managers who can avoid defaults and can unearth opportunities,” explains Mr Barry.
