Quantitative easing and low interest rates provide a positive environment for European high-yield bonds, according to John Stopford and Kieran Roane, managers of the Investec Monthly High Income Fund. With interest rates low, investors increasingly look to higher-risk assets such as high-yield bonds to provide an income. This, alongside bond purchases as a result of quantitative easing, could lead to increased demand which can drive prices higher.
The managers feel the European economy is improving, aided by lower energy costs and a weak euro. Low energy costs benefit the manufacturing sector and reduce household bills, and a weak euro often aids European export companies by making their goods cheaper to the rest of the world. The weak euro also means overseas earnings are worth more once translated back to euros and the managers expect lower energy costs to lead to an increase in consumer spending, which could provide a boost to the European economy.
As the economy improves, it becomes easier for companies to service their debts and default rates are expected to remain low in 2015. As the managers expect these factors to benefit higher-risk European high yield bonds, around 80% of the fund is currently invested across Europe, including the UK.
The managers favour bonds within the more defensive consumer goods & services and telecoms sectors which tend to withstand shorter term difficulties better than those within more economically sensitive sectors. They have reduced exposure to CCC and B rated bonds in favour of those higher up the bond spectrum and the duration of the fund (how sensitive it is to changes in interest rates) is also substantially lower than that of the index.
The fund is more cautiously positioned than its peers, reflecting the managers' shorter-term concerns: a potential Greek exit from the Eurozone, a large number of elections in Europe, the crisis in Ukraine and a potential rise in US interest rates. The fund sits within the IA £ High Yield sector. As such, although the fund is invested more defensively than its comparable peers, its investment remit is still among higher-risk 'junk' bonds. The fund is also able to invest in higher-risk emerging market bonds should the managers see fit.
Recent performance has been hurt by the fund's relatively cautious positioning as the highest-risk high-yield bonds have performed better than their lower-risk counterparts. The fund was hurt by an underweight exposure to financial bonds relative to the sector as these bonds have performed well. It was also negatively impacted by exposure to energy companies. This exposure has since been reduced as the managers expect a higher level of defaults in this sector following the fall in the oil price.
Over the past five years, the fund has returned 27.8%*, compared with 30.9% for the IA £ High Yield sector. Please remember past performance is not a guide to future returns. The fund currently yields 4.81%, although this is variable and not guaranteed.
Five year performance of the Investec Monthly Income Fund
Past performance is not a guide to future returns. * Lipper to 01/04/2015
|Annual percentage growth|
| Apr 10 -
| Apr 11 -
| Apr 12 -
| Apr 13 -
| Apr 14 -
|Investec Monthly High Income||7.89%||1.66%||9.6%||4.9%||1.35%|
|IA £ High Yield||7.88%||0.66%||10.67%||7.69%||1.13%|
|BofA Merrill Lynch Euro Non-Finan HY Const||10.21%||5.99%||13.8%||10.45%||6.55%|
Our view on this fund
The fund performed well through the financial crisis, falling to a lesser extent than its peers. However since this time, the fund has underperformed the sector which our analysis attributes underperformance to poor sector positioning. We feel performance is likely to improve should bonds experience a more difficult time; however, it is likely to lag peers in a rising bond market. This fund does not currently feature on the Wealth 150 list of our favourite funds across the major sectors as we have greater conviction in other managers.
Please note the fund's charges can be taken from capital, which can increase the yield but reduces the potential for capital growth.
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