Rising interest rates can also potentially introduce an element of volatility, but the fact that rising rates are normally associated with improving economies should make these periods more like shorter term tantrums than a real illness. So global high yield calls for investors who can think and stay long-term minded.
Focusing on the long-term strategy means investors need enough resolve to avoid much of the market noise that will frequently drum itself up over the years. An example of such “noise” today would be concerns over liquidity.
The high yield asset class, including its global extension, has always been a relatively less liquid asset class than its larger neighbors – and investors have been paid well in excess of default costs partially in recompense for this difference.
This is not to say that global high yield is entirely without risk. It is more illiquid, for example, than government bonds or the S&P 500. Bond covenants can have an impact on ultimate returns far out of proportion to their subtlety. Groups of quasi-insiders can sometimes maneuver to the disadvantage of others. Most of all, the leverage that defines issuers in this market can make returns more sensitive to unforeseen shifts in their competitive position.
This third asset class is one that can accomplish the seeming contradiction of “growth and income” with a globally diversified group of investments. It’s one whose correlations with the “growth” in equities and the “income’ in bonds is more than just a weighted average of the two. Now that is a third asset class to pick from.
*Beta measures the volatility of an investment or a portfolio relative to the market as a whole.
Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).
Non-investment-grade debt securities (high yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.
In the United States, Aberdeen Asset Management (AAM) the marketing name for the following affiliated, registered investment advisers: Aberdeen Asset Management Inc., Aberdeen Asset Managers Ltd, Aberdeen Asset Management Ltd and Aberdeen Asset Management Asia Ltd, each of which is wholly owned by Aberdeen Asset Management PLC. "Aberdeen" is a U.S. registered service mark of Aberdeen Asset Management PLC.
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Greg Hopper is head of global high yield at Aberdeen Asset Management.