Strong performance set to continue for US High Yield Bonds
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HONG KONG, 19 May 2010 - With the US high yield market continuing to benefit from strong inflows, robust new issuance and an encouraging trend in rating agency upgrades, the outlook for the market over the next one to two years remains positive, said Mr. Harley Lank, Vice President and portfolio manager for Fidelity.
Harley Lank is a Boston-based fixed income portfolio manager responsible for managing a range of portfolios focused on high yield bonds. He is traveling through Asia in May to discuss his views on the US high yield market with selected clients.
“Whilst I don’t expect 2010 will see a replay of the exceptionally high returns investors enjoyed in 2009, I remain convinced that there continues to be upside in US high yield bonds for a number of reasons,” he said.
“First, valuations are still reasonable. High yield spreads are just below the long term average, and historically, we’ve seen spreads trade below the average roughly 2/3 of the time, which means we are likely to see further tightening on top of the current 8 to 8.5% current yield.”
“Secondly, with the US economic recovery underway, there’s been a lot of discussion about rising interest rates. US high yield bonds are much less sensitive to rate movements than investment grade bonds, but more importantly, interest rates go up during periods of economic growth, which is generally positive for high yield companies.”
“Third, history tells us that the US high yield market typically sees multiple-years of strong performance following a negative year. 2008 was the largest downturn on record for high yield and was followed by the highest return on record in 2009. While I don’t expect to see returns as dramatic as 2009, I expect this trend to play out for at least one to two years more.’’
With respect to the Fidelity Funds – US High Yield Fund, Mr. Lank said he was continuing to look for fundamentally solid companies operating in defensive businesses with stable asset values and solid liquidity positions.
“I am overweight B- and CCC-rated bonds, which generally tend to outperform at this point in the credit cycle, but I’ve balanced the additional credit risk by being overweight more defensive sectors such as healthcare and telecom that don’t depend on a ‘V’ shaped recovery to perform well. In addition, I’ve taken advantage of select opportunities in publishing, technology and retailing and with the benefit of Fidelity’s research resources supporting me, I continue to look for mispriced opportunities in these sectors to add value to the portfolio.”
Mr. Lank said there continues to be risks associated with the high yield market that investors need to be informed of, but that much of the risk associated with corporate defaults have already been factored into current pricing.
“With improving economic data, better than expected earnings results, a decline in default rates and improving fundamentals in place, investor expectations remain positive for continued improvement for high yield issuers,” he added.
About Fidelity International
Fidelity International is an affiliate but separate company to Fidelity Investments and provides investment products and services to individuals and institutional investors outside of the Americas. Fidelity International has been in Asia for 40 years with offices in Japan, Korea, Australia, Hong Kong, Taiwan, Singapore, China. Fidelity International manages US$215.9billion Assets Under Management (as at 31st March 2010), has over 6 million customer holdings and manages 937 funds. Fidelity International has one of the largest proprietary research teams in the world, providing insights into around 90% of the world's stock markets (as measured by the Morgan Stanley Capital International World Index, 31 March 2008).
In Hong Kong, FIL Investment Management (Hong Kong) Limited currently offers more than 80 mutual funds to investors directly and through over 100 distributors, including retail banks and insurance companies. Fidelity in Hong Kong is the largest provider of the ORSO (Occupational Retirement Schemes Ordinance) Member Choice Defined Contribution Scheme and is also one of the top ten MPF (Mandatory Provident Fund) scheme providers in Hong Kong and has been awarded Asia Asset Management’s “Best of the Best Country Awards: Winner award for Hong Kong Best Client Servicing for MPF” in 2004, 2005, 2007 and 2008. In 2010, Fidelity was named “Hong Kong MPF Schemes Provider” by Asian Investors as well as winning “Best Equity Pension Group” and Best Mixed Asset Pension Group” over three years in Lipper Funds Awards.
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.Source: Towers Watson Manager Watch, as at 31 December 2009.
.Source: Towers Watson MPF Performance Book, as at 31 December 2009.
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