Joran Laird

High yield corporate bonds, focused on double and single B investment grades, provide steady performance and moderate volatility, according to T. Rowe Price fixed income portfolio specialist Joran Laird.

Coupon return, the annual interest paid on a bond throughout its duration, drives returns, Laird told the Professional Planner Researcher Forum.

“The major driver of the return is the coupon – the collection, the reinvestment and the compounding,” Laird said.

“That’s what’s driving the returns… you’re not relying on prices rising, you’re not relying on yields falling or spreads, narrowing, what you’re wanting is for these companies to honour their obligations to pay you your coupon and give you your money back and you do that over and over and over again.”

But investors cannot take a passive view as the high yield index is made up of 3600 bonds with 1500 issuers and ETFs fail to match the index every year, Laird said.

“The main thing about high yield is to avoid defaults,” he said.

“Passive ETFs, they don’t care about that. They just buy what they can. But as an active manager, you’re doing that individual credit research, trying to find those companies that will honour their obligations that you’re getting rewarded for.”

Laird said the average credit quality of high-yield fixed income has never been higher because many “fallen angels” or former investment-grade companies, had downgraded to high yield-grade markets, while lower-rated high yield companies were accessing private credit markets for funding.

“That’s improved the average credit quality of high yield public markets,” he said.

Allocating high yield to a 60 per cent equity and 40 per cent treasury bond portfolio over the past 26 years, would not have changed the return of 6.5 per cent, but would have lowered volatility and was thus a more efficient portfolio, Laird said.