European High-Yield Bonds

Greater predictability thanks to attractive features:

High-yield bonds are distinguished from other fixed-income asset classes by two key characteristics: high coupons and low duration. This combination makes them particularly attractive:

1. High coupon rates lead to predictable returns and cushion against potential spread and interest rate volatility.
2. A low duration generally results in lower sensitivity to changes in interest rates and spreads

Taken together, these two factors mean that even over relatively short time periods (5–6 years), the predictable coupon component accounts for a significantly higher share of total performance than the uncertain contribution from changes in interest rates and spreads. As a result, the realized return approaches the initial yield after just a few years, allowing for better return planning than in other bond segments with lower coupons and longer durations.

Flexibility as the Key to Success:

However, historical experience shows that the flexibility to extend the holding period by one year has almost always made it possible to recoup temporary losses in the past, resulting in a return similar to the yield to maturity.² All other things being equal, this effect is all the more pronounced the shorter the remaining maturity of the bonds is.

Star Returns and Realized Performance

Important requirements for investors:

An investment in an index-tracking high-yield product requires that the investor:

1. can withstand volatility and
2. has the flexibility to postpone potential withdrawal plans if the market is experiencing a significant drawdown at the planned withdrawal time.

Without this flexibility, the return achieved over a period of three, five, or even seven years may differ significantly from the initial yield and, in some cases, may even be negative.

Top returns and realized annual returns:

Customized Solutions:

For investors with a particularly low tolerance for volatility or who have capital needs at specific points in time, there are special product options:

Short-Duration Portfolio:

• Invest only in bonds with a maximum of three or four years remaining until maturity.
• Significantly reduces the volatility of a high-yield investment.
• Enables rapid accumulation of liquidity by halting the reinvestment of maturing bonds.

Maturity Portfolio:

• Ideal for investors with a predetermined payout date.
• Align the maturity dates of the bonds as closely as possible with the payment date.
• Minimizes reinvestment risk and bond price risk at the time of payment.

Leadership Strategy

• Ideal for investors with multiple predefined payout dates.
• combines multiple maturity portfolios with maturities that coincide with the respective payout dates.
• Minimizes reinvestment risk and bond price risk at the respective payout dates.

Conclusion:

European high-yield bonds offer an attractive investment profile for risk-tolerant investors due to their high coupons and low duration. Through targeted portfolio construction, as utilized in HAGIM’s CIO Series, volatility and payout profiles as well as credit risks can be tailored to individual client preferences.
Active management focused on fundamental credit analysis also helps minimize default risks and thereby achieve better performance.

As experienced asset managers with core expertise in fixed-income strategies, the experts at HAGIM are here to help you design investment solutions tailored to your needs.