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As market volatility and economic uncertainty persists, investors are searching for defensive strategies and high-income opportunities. Although rising rates provide interesting opportunities to reinvest at higher coupon levels, market volatility and declining prices create uncertainty for many fixed income investors. The balancing act between income and price returns raises an interesting question—does income or price tend to drive total returns?
For most risk assets, total return is achieved predominantly via capital price return, but not in high yield. Over long-term periods, income tends to drive the bulk of the total return for high yield bonds. In fact, over 100% of the cumulative total return in global high yield since January 2015 has come via income. Exhibit 1 shows that income accrues over time and while the price/capital return moves around, it is a much smaller part of the overall total return. Looking at monthly data from 2015-2022, historically, income has comprised around 85% of the total return as most bonds are taken out above par. We believe this highlights a critical point—it is not timing the market that is important in high yield, but rather, it is the time in the market that drives long-term returns.
For asset allocators interested in timing their entry to the asset class, we believe it is important to remember the value of income over time. For this reason, we believe a strategic allocation to high yield offers compelling opportunities to generate high income and competitive long-term returns.
A strategic standalone allocation to high yield can be further supplemented by tactical increases or decreases depending on current valuations. This dynamic approach can help capitalize on high income and capital appreciation opportunities. For example, when valuations are relatively cheap and capital appreciation potential is compelling, as we are seeing in the current environment, an increased allocation to high yield may help enhance long-term total returns. While price movements are a component of total returns, the harvest from income typically drives long-term returns in this asset class.
Exhibit 1: Income drives the bulk of total returns in high yield
Source: Bloomberg, BofA. Based on the ICE BofA Global High Yield Index. Reflects the total cumulative return for the index split into the return from prices and income. Based on monthly data from December 2015 to March 2022.
This material is provided by Aegon Asset Management (Aegon AM) as general information and is intended exclusively for institutional and wholesale investors, as well as professional clients (as defined by local laws and regulation) and other Aegon AM stakeholders.
This document is for informational purposes only in connection with the marketing and advertising of products and services, and is not investment research, advice or a recommendation. It shall not constitute an offer to sell or the solicitation to buy any investment nor shall any offer of products or services be made to any person in any jurisdiction where unlawful or unauthorized. Any opinions, estimates, or forecasts expressed are the current views of the author(s) at the time of publication and are subject to change without notice. The research taken into account in this document may or may not have been used for or be consistent with all Aegon AM investment strategies. References to securities, asset classes and financial markets are included for illustrative purposes only and should not be relied upon to assist or inform the making of any investment decisions. It has not been prepared in accordance with any legal requirements designed to promote the independence of investment research, and may have been acted upon by Aegon AM and Aegon AM staff for their own purposes.
The information contained in this material does not take into account any investor's investment objectives, particular needs, or financial situation. It should not be considered a comprehensive statement on any matter and should not be relied upon as such. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to any particular investor. Reliance upon information in this material is at the sole discretion of the recipient. Investors should consult their investment professional prior to making an investment decision. Aegon AM is under no obligation, expressed or implied, to update the information contained herein. Neither Aegon AM nor any of its affiliated entities are undertaking to provide impartial investment advice or give advice in a fiduciary capacity for purposes of any applicable US federal or state law or regulation. By receiving this communication, you agree with the intended purpose described above.
Past performance is not a guide to future performance. All investments contain risk and may lose value. Investments in high yield bonds may be subject to greater volatility than fixed income alternatives, including loss of principal and interest as a result of the higher likelihood of default. Value of these securities may also decline when interest rates increase. Income is not guaranteed. Results for certain charts and graphs are included for illustrative purposes only and should not be relied on for investment decisions. This document contains "forward-looking statements" which are based on Aegon AM's beliefs, as well as on a number of assumptions concerning future events, based on information currently available. These statements involve certain risks, uncertainties and assumptions which are difficult to predict. Consequently, such statements cannot be guarantees of future performance, and actual outcomes and returns may differ materially from statements set forth herein.
Statements concerning financial market trends are based on current conditions, which will fluctuate. There is no guarantee these investment or portfolio strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest over the long-term, especially during periods of increased market volatility.
The following Aegon affiliates are collectively referred to herein as Aegon Asset Management: Aegon USA Investment Management, LLC (Aegon AM US), Aegon USA Realty Advisors, LLC (Aegon RA), Aegon Asset Management UK plc (Aegon AM UK), and Aegon Investment Management B.V. (Aegon AM NL). Each of these Aegon Asset Management entities is a wholly owned subsidiary of Aegon N.V. In addition, the following wholly or partially owned affiliates may also conduct certain business activities under the Aegon Asset Management brand: Aegon Asset Management (Asia) Limited (Aegon AM Asia), Aegon Private Fund Management (Shanghai) Co., Ltd.
Aegon AM UK is authorised and regulated by the Financial Conduct Authority (FRN: 144267) and is additionally a registered investment adviser with the United States (US) Securities and Exchange Commission (SEC). Aegon AM US and Aegon RA are both US SEC registered investment advisers. Aegon AM US is also registered as a Commodity Trading Advisor (CTA) with the Commodity Figures Trading Commission (CFTC) and is a member of the National Futures Association (NFA). Aegon AM NL is registered with the Netherlands Authority for the Financial Markets as a licensed fund management company and on the basis of its fund management license is also authorized to provide individual portfolio management and advisory services in certain jurisdictions. Aegon AM NL has also entered into a participating affiliate arrangement with Aegon AM US. Aegon AM Asia is regulated in Hong Kong by the Securities and Futures Commission of Hong Kong for Professional Investors only (under SFC Ordinance Cap 571); in China, Aegon Private Fund Management (Shanghai) Co., Ltd is regulated by the China Securities Regulatory Commission (CSRC) and the Asset Management Association of China (AMAC) for Qualified Investors only; In Taiwan Neither Aegon Asset Management nor any of its affiliates are registered and may not sell, issue, or offer any products or services while in Taiwan. Marketing is intended to Professional Investors only has not been reviewed or endorsed by any regulatory authority in Taiwan; In Korea, Aegon USA Investment Management (AUIM) is registered as a CB-DIM and delegates Aegon Asset Management (Asia) Ltd to provide marketing and client services in Korea. Intended for Qualified Professional Investors only and contents have not been reviewed or endorsed by any regulatory authority in Korea; In Japan, neither Aegon Asset Management nor any of its affiliates carry on investment business. Intended for accredited, expert or institutional investors only and contents have not been reviewed by the Financial Services Agency of Japan.
Mark Benbow, portfolio manager, is a member of the global leveraged finance team. He specialises in high yield bonds and co-manages our global high yield strategies.
