Thomas Rentsch
Senior Portfolio Manager High Yield
Can high yield corporate bonds keep up with a traditional 60/40 portfolio? Our analysis shows: since 2003, European high yield bonds have achieved a similar performance to a traditional 60/40 allocation and with less volatility. A differentiated look at the facts and implications for institutional investors.
The 60/40 portfolio – a strategic allocation of 60% in equities and 40% in government bonds – is traditionally regarded as a benchmark for diversified institutional portfolios. However, empirical evidence from the last two decades shows that high yield corporate bonds can be a more efficient alternative.
The attractiveness of high yield corporate bonds is based on their hybrid characteristics. On the one hand, their duration exposure gives them an interest rate sensitivity similar to that of government bonds. On the other hand, they participate in the company’s success through the credit spread – comparable to equities, but with reduced volatility.
The significant yield pick-up also offers an attractive carry element. The empirical performance analysis for the European market is particularly interesting. As high yield has only been a relevant market here for around 25 years, and in order not to give high yield bonds an unfair advantage, we start the comparison from the low of the equity market in March 2003. Since this point in time, high-yield European corporate bonds were only narrowly beaten by a monthly rebalanced equity/government bonds 60/40 portfolio. However, corporate bonds were more than 10% less volatile during this period (9.1% for HY vs. 10.2% for 60/40).
Source: Bloomberg, own calculations, equities = EuroStoxx50 (SX5E Index), German government bonds = Bloomberg Germany Govt All Bonds Total Return Index (BCEG1T Index), Euro High Yield BB-CCC = Bloomberg Euro High Yield ex Financials Total Return Index (I20672EU Index), 60/40 rebalanced = each month starts with 60% equities & 40% government bonds, 31.03.2003 to 31.10.2024
However, regional differentiation is important. If you look at the US high-yield market, for example, which has been around for almost 40 years, US high yield bonds were able to keep up with a 60/40 portfolio for a long time, but were ultimately clearly left behind due to an impressive equity rally over the last 10 years.
Source: Bloomberg, own calculations, equities = S&P500 (SPX Index), US government bonds = Bloomberg US Treasury Index (LUATTRUU Index), US High Yield BB/B/CCC = Bloomberg US Corporate High Yield Total Return Index (LF98TRUU Index), 60/40 rebalanced = each month starts with 60% equities & 40% government bonds, 31.03.2023 to 31.10.2024.
Conclusion
For institutional investors such as life insurers and pension funds, this means that high yield corporate bonds can – with adequate risk management – represent a sensible strategic alternative or supplement to the classic 60/40 portfolio. Fundamental bottom-up credit analysis, active risk management and an in-depth understanding of technical market factors are crucial for investment success.
With its dedicated credit research team and many years of expertise in fundamental analysis, HAGIM has the necessary resources to leverage this potential for its institutional clients. We develop customized investment solutions that take the specific ALM requirements into account.
Source: Bloomberg (Bloomberg High Yield (Euro) ex Fin TR Index Unhedged EUR (I20672EU Index); Bloomberg US Corporate High Yield Total Return Index Value Unhedged USD (LF98TRUU Index); Bloomberg Germany Govt All Bonds Total Return (BCEG1T Index); Bloomberg US Treasury Total Return Unhedged USD (LUATTRUU Index); EURO STOXX 50 EUR (SX5E Index); S&P 500 INDEX (SPX Index))
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