Asset AllocationFebruary 4, 2014

When Bonds are Worth the Risk

<em>Investors have been paid to not play it safe when allocating to fixed income since the financial crisis.</em>

Reported by Featured Author

(February 4, 2014) — Investors who took a punt on relatively risky fixed income over last five years would have notched up the best possible risk-adjusted returns for their portfolios, research has shown.

US and European high-yield had the best performance, on both an excess return and Sharpe ratio basis in the five years to the end of 2013, consulting firm Redington found.

US high yield returned 18.2% overall with a 2.05 Sharpe ratio, while its Europe-issued counterpart made 21.1%, but with a slightly worse Sharpe ratio of 1.77.

The next best performer on a risk-adjusted bases was US leveraged loans. This category of fixed income made 13.1% on an absolute basis with a 1.68 Sharpe ratio.

“Over a five-year period, US high yield has been the top performing asset class on a risk-adjusted basis over the last three quarters with a Sharpe Ratio of 2.05 in Q4,” a note from Redington said. “European High Yield has produced the highest excess return for the same three quarters with an excess return of 21.1% in Q4.”

One asset class has been underperforming for longer than these have outperformed.

“Hedge Fund – Macro has been the only asset class to consistently offer a negative excess return over the time horizon, having done so now for six successive quarters,” Redington said.

The sector finished off the five-year period with a 4.1% loss.

Over a three-year period, the top two performers maintained their positions, being followed by risk parity, which made an 8.2% excess return, with a 0.91 Sharpe ratio.

Looking at the past year, however, developed market equities have cantered past fixed income securities, making 26.4% over 2013 with a 2.89 Sharpe Ratio.

To read the full research note, click here.