By Peter Laurelli, CFA | eVestment Global Head of Research
U.S. high yield fixed income is eVestment’s most populated primary fixed income universe (just ahead of U.S. core) and among the largest traditional non-cash active strategy segments. Since 2017, however, institutional AUM appears not to have grown (Chart 1), and the universe constituent count has been in a relatively constant state of refinement since 2015 (Chart 2).
Chart 1: U.S. High Yield Fixed Income Institutional Assets & Cumulative Flows
Source: eVestment Asset Flows, Q1 2005-Q1 2020, USD millions
Chart 2: U.S. High Yield Fixed Income Strategies Reporting Quarterly Returns
Source: eVestment Analytics, Q1 2005-Q1 2020
From a regional perspective, U.S.-domiciled accounts are the largest investor base, followed by Europe and APAC (Chart 3). Reported data, however, indicates U.S. investors have not been a broad source of asset growth for products since 2012.
Additionally, regional interest from Europe has not been strong since 2015, and APAC investor interest began to tail off after 2017 (Chart 4).
Chart 3: Reported Investor Domicile AUM In U.S. High Yield Fixed Income Strategies
Source: eVestment Analytics & Asset Flows, $780 billion in reported domicile AUM, Q4 2019
Chart 4: Cumulative Investor Flow By Domicile For U.S. High Yield Fixed Income
Source: eVestment Asset Flows, Q1 2009 – Q1 2020, values in USD millions
From an exposure standpoint, the underlying credit quality of portfolios appears to have been increasing, along with median three-year rolling returns. B-rated and CCC/Caa-rated securities have both been a declining average proportion, while BB/Ba- and BBB/Baa have been rising since at least 2018. This is more a sign of the state of high yield markets in general than an active choice by broadly by high yield strategies.
The size of the U.S. corporate BBB- and single A-rated markets have increased dramatically in the last several years, while the size of the U.S. high yield market has been in decline since 2016. As seen in the chart above, the timing of the decline in opportunity set roughly matches the broad decline in cumulative flow.
Charts 5-6: Average Credit Quality For U.S. High Yield Fixed Income Strategies
Source: eVestment Analytics, Q1 2009 – Q1 2020, returns in USD.
Entering Q1 2020, the state of the U.S. high yield fixed income market in terms of opportunity set, interest to investors, and attractiveness to managers to develop and/or maintain products, was in a state of decline. At least, that was the state of the market up until Q1 2020.
With the onset of the pandemic, U.S. corporate credit markets began to be severely impacted. U.S. high yield strategies underwent their second largest average losses in twenty years, behind only Q4 2008. Along with losses came one of the largest dispersions of returns within the group, measured by the difference between the 2th and 75th percentile returns (negative return quarters in red), indicating relative exposures by sector likely played a significant role.
Chart 7: Average Universe Returns For U.S. High Yield Fixed Income Strategies
Chart 8: Difference Between 25th & 75th Percentile Returns
Source: eVestment Analytics, Q1 2000 – Q1 2020, returns in USD
With the U.S. economy experiencing such a rapid negative economic transition, the expectation is for the U.S. high yield market to expand significantly. Already, data from S&P shows that as of mid-June, 5.2% of the U.S. high yield corporate bond index is made up of bonds which were BBB-rated at the beginning of 2020.
Unfortunately, given the recent developments related to the pandemic, the economic landscape is not set to improve. This will most likely only continue to increase size and diversity of opportunities within U.S. high yield markets.
Since 2005, the greatest expansion for U.S. high yield strategies came in the wake of the global financial crisis. If this segment is going to recover from its multi-year contraction, now would appear to be the most likely time for it to begin.