High Yield Still the Sharpest Place to Be—But For How Long?

Redington’s quarterly risk-adjusted returns report shows high yield has dominated in the short term, but risk parity was the long-term winner.

High yield bonds and leveraged loans gave the best risk-adjusted returns in the past 12 months, boosting those investors on the hunt for income-producing assets, according to research by Redington.

In the 12 months to the end of June European high yield bonds—as measured by the Merrill Lynch European High Yield index—gained 13.3% with a volatility of 2.1%, giving the asset class a Sharpe ratio of 6.46. This was by far the best risk-adjusted return of any asset class over the period, according to the consultant’s quarterly report into risk and returns.

This outstripped the risk-adjusted returns from risk parity strategies, although this sector posted the best nominal return of 25.8% over the period. US high yield bonds and US leveraged loans also gave investors a better “bang for the buck” in the past 12 months.

In its commentary alongside the research, Redington said the low spreads over government bond yields currently seen in high yield could make it difficult for the performance to be replicated. European and US high yield bonds ranked in the top five best risk-adjusted returns in the 12-month, three-year, five-year and 10-year periods covered by the research.

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But flow data published by Bank of America Merrill Lynch showed $2.7 billion had been redeemed from high yield bond funds during the week to July 16 following two months of underperformance relative to US equities. This was the biggest weekly outflow from the high yield sector since August 2013.

Redington also pointed out that improved returns and low volatility across most asset classes had led to higher Sharpe ratios than normal.

Longer-term, however, risk parity continues to show the best track record on a risk-adjusted basis: Over three years the Salient Risk Parity index has risen 14.5% with a volatility of 9.3%, giving a Sharpe ratio of 1.56, the best in that period. Risk parity strategies also lead the way over 10 years.

Related content: Sharpe Parity: the New Risk Parity? & Is Volatility Too High?

Challenges Ahead for Traditional Asset Managers, Says BCG

The global asset management industry made profits of $93 billion in 2013, but traditional managers face disruptive challenges, the Boston Consulting Group has said.

The global asset management industry recorded its second consecutive year of post-crisis “solid growth” last year, but traditional managers must advance to survive in an ever-changing business, according to the Boston Consulting Group (BCG).

“Despite the mostly positive picture, traditional asset managers have little room for complacency,” said Brent Beardsley, BCG’s global leader of asset and wealth management.

“Despite the mostly positive picture, traditional asset managers have little room for complacency,” said Brent Beardsley, BCG. According to the consulting firm, global assets under management grew 13% to $68.7 trillion in 2013 and fund managers’ profits jumped to $93 billion, just 7% behind their pre-crisis peak.

However, because these gains were largely driven by bull equity markets, BCG said new asset flows only accounted for a modest part of total growth.

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The firm also warned that traditional managers faced certain challenges “exacerbated by a new new-normal environment of heightened global competition, rapid change, and restricted room to manoeuvre.” The report said managers would come across these disruptive changes while navigating the industry’s “turbulent structural shifts.”

“The market continues to shift away from traditional managers’ main business of actively managed core assets, eroding their asset share in the global pool,” Beardsley said.

Tightening regulations will force managers to continually adapt to new rules according to BCG. To move past increased operational complexities, asset managers must create new functionalities in a matter of months instead of years as had been the case in the past. 

Advancements in digital technologies and data innovation would also give managers a competitive edge, the report found. According to the firm’s research, 96% of equity trades and 86% of fixed income and money market trades were managed electronically in 2013, compared with 90% and 75% in 2011.

BCG found growing investor appetite for specialty solutions, multi-asset capabilities, and passive products, supporting the need for managers to “shift their focus from selling products to solving client problems” to survive.

“The continuing rapid advance of solutions and specialties in 2013 confirms a structural shift in the market,” the consulting firm said. “Managers that cling exclusively to traditional assets will continue to be squeezed.”

Competition also has monumentally increased, the report said, especially as non-traditional providers are expanding into traditional areas. Even though traditional managers are slowly building non-traditional asset capabilities, BCG said it would take time to secure new territory.

Globalization adds to difficulties faced by traditional managers, the report also found, as asset managers must adapt to local regulations and develop an advanced operating model to safeguard presence in multiple markets. 

“A target operating model—beyond boosting efficiency—can provide the blueprint that managers need to unlock cash and free management attention for product innovation, entry into new asset classes, and development of client relationships,” the report said. “We believe it is a key to flexibility, scalability, and profitable growth.”

Related Content: KPMG: Asset Management Industry is Not Sustainable, SODI: Uber, Google, and the End of Asset Management

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