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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


GIPS® Disclaimer
DWS claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. DWS has been independently verified for the periods from 1996 through 2016. The verification report(s) is/are available upon request.


Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.

Composite Disclaimer
The brand DWS, formerly known as Deutsche Asset Management (Deutsche AM), stands for the asset management activities conducted by subsidiaries of DWS Group GmbH & Co. KGaA. Clients will be provided with DWS‘ products or services by one or more of its subsidiaries that will be made transparent to clients in the contracts, agreements, offering materials or other documentation relevant in relation to DWS’ products and services.


All opinions and estimates herein, including forecast returns, reflect our judgment on the date of this report and are subject to change without notice and involve a number of assumptions which may not prove valid.


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.


Investments are subject to various risks including, but not limited to market fluctuations, regulatory change, possible delays in repayment and loss of income and principal invested. The value of investments can fall as well as rise and you may not recover the amount originally invested at any point in time. Furthermore, substantial fluctuations of the value of the investment are possible even over short periods of time.


This publication may contain forward looking statements. Forward looking statements include, but are not limited to assumptions, estimates, projections, opinions, models and hypothetical performance analysis. The forward looking statements expressed constitute the author’s judgment as of the date of this material. Forward looking statements involve significant elements of subjective judgments and analyses and changes thereto and/or consideration of different or additional factors could have a material impact on the results indicated. Therefore, actual results may vary, perhaps materially, from the results contained herein. No representation or warranty is made by DWS as to the reasonableness or completeness of such forward looking statements or to any other financial information contained herein.


Past performance is not an indication of future results. Nothing contained herein shall constitute any representation or warranty as to future performance. Further information is available upon investor’s request.


This document may not be reproduced or circulated without our written authority. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States.

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:


Oppenheim Kapitalanlagegesellschaft mbH (retail and institutional funds under the German Investment Act (Investmentgesetz)) and

Sal. Oppenheim jr. & Cie. AG & Co. KGaA under the German Investment Act (Investmentgesetz) or to the extent that the latter operated the financial portfolio management for institutional clients in accordance with section 1 1a no. 3 KWG.

Policies for valuing portfolios, calculating performance and preparing compliant presentations as well as a complete list and description of the Firm’s composites are available upon request. Unless otherwise stated, leverage has not been used in any of the portfolios included in the Composite.


Disclaimer
DWS is the brand name of DWS Group GmbH & Co. KGaA and its subsidiaries under which they operate their business activities. The respective legal entities offering products or services under the DWS brand are specified in the respective contracts, sales materials and other product information documents. DWS, through DWS Group GmbH & Co. KGaA, its affiliated companies and its officers and employees (collectively “DWS”) are communicating this document in good faith and on the following basis.


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, this document is for information/discussion purposes only and does not constitute an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice.


The document was not produced, reviewed or edited by any research department within DWS and is not investment research. Therefore, laws and regulations relating to investment research do not apply to it. Any opinions expressed herein may differ from the opinions expressed by other legal entities of DWS or their departments including research departments.

The information contained in this document does not constitute a financial analysis but qualifies as marketing communication. This marketing communication is neither subject to all legal provisions ensuring the impartiality of financial analysis nor to any prohibition on trading prior to the publication of financial analyses.


This document contains forward looking statements. Forward looking statements include, but are not limited to assumptions, estimates, projections, opinions, models and hypothetical performance analysis. The forward looking statements expressed constitute the author‘s judgment as of the date of this document. Forward looking statements involve significant elements of subjective judgments and analyses and changes thereto and/ or consideration of different or additional factors could have a material impact on the results indicated. Therefore, actual results may vary, perhaps materially, from the results contained herein. No representation or warranty is made by DWS as to the reasonableness or completeness of such forward looking statements or to any other financial information contained in this document. Past performance is not guarantee of future results.

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Investments are subject to various risks, including market fluctuations, regulatory change, possible delays in repayment and loss of income and principal invested. The value of investments can fall as well as rise and you might not get back the amount originally invested at any point in time. Furthermore, substantial fluctuations of the value of any investment are possible even over short periods of time. 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 any transaction.


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For investors in Hong Kong
In Hong Kong, this document is issued by DWS Investments Hong Kong Limited and the content of this document has not been reviewed by the Securities and Futures Commission.
© 2021 DWS Investments Hong Kong Limited


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In Australia, this document is issued by DWS Investments Australia Limited (ABN: 52 074 599 401) (AFSL 499640) and the content of this document has not been reviewed by the Australian Securities Investment Commission.
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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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