The Case for Going Global in High Yield

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This is a sponsored article from DWS.

Despite Significant Spread Tightening Global High Yield Still Boasts Several Compelling Advantages

With global interest rates at or near historic lows in several markets, global high yield is one of the few fixed income asset classes which offer the potential for meaningful, positive returns. With current yields at 4.4% for both GHY1 and US HY2, vs 1.9% for US IG3 and 3.4% for EM Asia Corporates4, we believe GHY is likely to benefit from sustained investor interest from yield-hungry investors.

Whilst spreads have tightened substantially since March 2020, the HY market5 remains 35 basis points higher than end 20196 levels. The fundamental picture is also turning more positive with improving economic activity. Aside from attractive relative valuations and standing to benefit from improved economic fundamentals, there are several other arguments in favour of GHY.

Past performance is not a reliable indicator of future returns. No assurance can be given that investment objectives will be achieved.Source: DWS Investment GmbH, as of January 2021.

Diversification and lower credit risk

One of the most important arguments in favour of Global HY7 is that it represents a broader investment universe and higher credit quality versus US HY8 alone. The average rating for Euro HY9 for example is BB3 versus B1 for US HY10. Credits rated CCC and below also make up approximately 7% of Euro HY, compared to 12% for US HY9.

Equally relevant is sector diversification. Relative to Euro HY, US HY has higher exposure to the Energy sector (5% and 13% respectively9), which is highly sensitive to commodity prices. Conversely, the Euro HY index has a noticeably larger exposure to Banking and less cyclical Telecommunication sectors.

Exploiting market inefficiencies

Another key benefit is the concept of home issuer bias, whereby EUR bonds of a US-based issuer can carry a higher yield-to-worst after hedging the currency risk relative to the same company’s USD bonds, and vice versa. A truly global strategy can exploit this mispricing accordingly.

Downside mitigation vs. equity

Global HY11 has historically offered more potential for downside mitigation relative to equities12 during equity bear markets and has rebounded quicker following a decline. Over the 10-years ending 1/31/21, HY has produced a downside capture of 48% vs. S&P 500.

Why is it interesting for Asian-based investors?

Asian-based investors have shown a preference for Asian credit, especially HY13. While Asia’s default rate is expected to compare well to other regions, absolute default rates are likely to stay above historical averages14. China’s recent increase in defaults underscores the need for proper diversification especially as China comprises more than half of the Asia HY market.

Moreover, US HY correlations with Asian HY and IG are moderate at 0.59 and 0.10 respectively15. Thus, Global HY with a YTW of 4.58%16 can be appealing for Asian investors looking to diversify their regional exposures.

Why DWS?

Experienced team and long-term track record

Seven portfolio managers averaging 20 years of investment experience. Seasoned PM Gary Russell, is head of US/GHY and lead PM for the GHY strategy17, supported by 5 dedicated HY traders and 17 HY analysts covering around 600 issuers globally.

The Global HY strategy18 has outperformed its benchmark by 0.34% p.a. over the last 10 years and 0.28% p.a. over the last 5 years19, outperforming across the 1-, 3-, 5-, and10-year periods (gross of fees).

Strong risk management minimizing downside risks

Exposure is focused in the belly of the credit curve (eg. BB/B exposure). We look at risk relative to return and size positions based on downside scenarios to mitigate volatility of riskier holdings. This approach enabled us to successfully navigate different market environments, particularly difficult ones (eg. 2008, 2015, 2018, recent corona sell-off).

Low default rate track record vs. market

Through a diligent focus on downside risk management and fundamental analysis, for example by calculating expected recovery values prior to investment, our platform has had 78% fewer defaults than Moody’s Speculative Grade Index in the last 14 years20 while our HY strategy default rate averaged 0.15%21 vs 2.92%22 for Global HY over the last 10 years.

Past performance is not a reliable indicator of future returns. No assurance can be given that investment objectives will be achieved. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect. Source: DWS Investment GmbH, as of December 2020

Rolling 5-year periods (MiFID-req.)

Risks

– Bond funds: increase in yields of price decreases on the bond markets and/or an increase in spreads on higher-interest securities
– Country risk, issuer, counterparty creditworthiness and default risk
– Use of derivative financial instruments, if applicable
– Currency-exchange risks, if applicable
– The unit price may at any time fall below the purchase price at which the customer acquired the unit


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This document has been prepared without consideration of the investment needs, objectives or financial circumstances of any investor. Before making an investment decision, investors need to consider, with or without the assistance of an investment adviser, whether the investments and strategies described or provided by DWS, are appropriate, in light of their particular investment needs, objectives and financial circumstances. Furthermore, any report or analysis within this document is shown for information/discussion/illustrative purposes and does not constitute an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. The information contained in this document does not constitute investment advice. DWS does not give tax or legal advice. Investors should seek advice from their own tax experts and lawyers, in considering investments and strategies suggested by DWS. The terms of any investment will be exclusively subject to the detailed provisions, including risk considerations, contained in the Offering Documents.  When making an investment decision, you should rely on the final documentation relating to the transaction and not the summary contained herein.


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DWS (the “Firm”) is a division of DWS Group GmbH & Co. KGaA and includes all portfolios directly managed for the Firm by DWS Investment GmbH (till 31st August 2018 Deutsche Asset Management Investment GmbH), DWS International GmbH (till 31st August 2018 Deutsche Asset Management International GmbH), Deutsche Asset Management (UK) Limited, Deutsche Asset Management S.A., Deutsche Asset Management (Asia) Limited and DWS CH AG (till 31st August 2018 Deutsche Asset Management Schweiz AG; excluding portfolios focusing on Switzerland Real Estate Strategies).On 1st April 2018 the carve-out of the asset management team of Sal. Oppenheim jr. & Cie. AG & Co. KGaA to a dedicated asset management branch of Deutsche Asset Management International GmbH became effective.On 23rd March 2018 DWS was listed on the Frankfurt Stock Exchange. Therefore, on 1st April 2018 the name of the GIPS Entity was changed from Deutsche Asset Management EMEA to DWS.On 1st January 2015 the performance track record of the GIPS compliant entity “Deutsche Asset Management Schweiz” that consists of portfolios managed by Deutsche Asset Management Schweiz AG (excluding portfolios focusing on Switzerland Real Estate Strategies) has been merged into the GIPS firm Deutsche Asset Management EMEA.Since 1st January 2014, the performance history of the GIPS-compliant unit “”Oppenheim Asset Management”” was merged into the GIPS Firm Deutsche Asset Management EMEA. “Oppenheim Asset Management” included portfolios managed by:


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Footnote
1. ICE BofA Global High Yield Index (HW00), as of 1/31/21
2. ICE BofA US High Yield Index (H0A0), as of 1/31/21
3. ICE BofA US Corporate Index (C0A0), as of 1/31/21
4. ICE BofA Asian Dollar Corporate Index (ACOR), as of 1/31/21
5. The High Yield market is represented by the ICE BofA Global High Yield Index (HW00).
6. 410bps as of 12/31/19 vs 375bps as of 12/31/20
7. ICE BofA Global High Yield Index (HW00), as of 1/31/21, ff. if not stated otherwise
8. ICE BofA US High Yield Index (H0A0), as of 1/31/21, ff. if not stated otherwise
9. ICE BofA Euro High Yield Index (HE00), as of 1/31/21, ff. if not stated otherwise
10. As of 1/31/21
11. Bloomberg Barclays Global High Yield Index, as of 10/30/20
12. S&P 500 Index, as of 10/30/20
13. Source: DWS Investment GmbH, as of January 2021
14. JPM Asia HY default rate forecast for 2020 and 2021 is 3.0% and 2.6% respectively, lower than EM HY (3.5% and 2.8% respectively) and US HY (6.7% and 4.0% respectively) but higher than historical averages. Source: JP Morgan, as of 24 November 2020.
15. December 31, 2014 – December 30, 2020
16. Bloomberg Barclays Global High Yield Index, as 1/29/21
17. Gary Russell has 28 years of investment experience, thereof 24 years at DWS.
18. Global High Yield Corporate Bond Composite, Code: GHYCB, as of 12/31/20
19. Source: DWS Investment GmbH, as of 12/31/2020
20. Source: Moody’s, as of 12/31/19
21. Issuer-Weighted default rate of our US HY rep account, as of 12/31/19
22. Moody’s Issuer-Weighted Spec-Grade Default Rates – Global Spec, as of 12/31/19

This is a sponsored article from DWS.

 

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