10 rules for yield hunters

Fixed Income Boutique

Leer 8 min

12 Mayo 2020

Interest rates are likely to stay in their deep hole for some time. Nonetheless, anyone hunting for corporate bonds who follows ten solid rules can still go home with an attractive yield.

Rule 1: Target higher yields with precision

Corporate bonds offer a yield premium compared to government bonds, but it is key that this higher yield compensates the investor for the higher risk they take. In order to weigh this up, it is essential that investors go beyond the credit ratings assigned by rating agencies and scrutinize the issuing companies themselves.

Rule 2: Track down and exploit market inefficiencies

But there’s more to it than just checking credit quality. If you keep a close eye out for the market inefficiencies that occur in all phases of the economic cycle when selecting your investments, you can exploit them to your benefit. They occur in the global investment universe because investors frequently only invest in one region or currency. For example, if a company has bonds outstanding in various currencies, you should always pick the one with the highest yield potential for your chosen maturity. In addition to a great deal of experience, you also need the right tools to be able to track down such valuation differences and identify the most profitable investment option.

Rule 3: Hedge against currency risk and factor in the costs

If the bond identified as the most profitable option is not in the investor’s home currency, an exchange-rate risk arises. The best way that investors can protect themselves against this is by taking out a futures contract when exchanging their own currency into the one needed for the investment in order to “freeze” the exchange rate. However, the entire investment is worthwhile only if the yield left over after deducting the hedging costs is worth it.

Rule 4: Diversify your risks and manage them actively

So far, so good. But what about unforeseen events that can trigger market disruption? So as not to be completely and utterly at their mercy, investors are better off diversifying their risks across a global portfolio rather than just backing a small handful of bets. Also, the positions in a portfolio should never be allowed to rest – they have to be flexibly managed. This is because changes in the market environment can increase risks, but they can also provide investment opportunities. In order to determine which adjustments in a portfolio are needed and when, world economic and political events have to be constantly observed and reassessed, as do investor sentiment and credit ratings. A strong network of reliable experts who know their way around the global investment universe can be worth their weight in gold.

Rule 5: Favor the quick brown foxes

And there’s something else worth knowing about credit ratings. Before the rating agencies upgrade a company, the yield premium on the bonds in question typically drops significantly. When the yield drops, the price rises because a bond’s yield and price move in opposite directions. In this case, the prices of the issuer’s bonds rise in anticipation of the upgrade. You can profit from this if you can recognize the candidates for an upgrade early on. Years of experience are also an advantage in developing this sense. Reclassifications are especially common in the lower investment-grade range, known as the “mid-yield” segment of A+ to BBB- ratings, and at the upper end of the non-investment-grade range for BB+ to BB- ratings. Both segments offer a wide selection of liquid bonds, facilitating broad diversification and ensuring tradability at all times.

Rule 6: Don’t forget any of the rules

When hunting for yields, the above rules can make a crucial difference in your investment success. I also follow them all systematically in the Vontobel Fund – Global Corporate Bond Mid Yield. This has proven its worth, as reflected in the fund’s track record to date.

Rule 7: Know your hunting grounds

The Vontobel Fund – Global Corporate Bond Mid Yield is a compact portfolio of corporate bonds from issuers with solid credit quality from various industries all over the world, whose yield premiums more than compensate for the risks taken. Its investment universe covers the entire investment-grade universe (AAA to BBB-), where I focus investments in the “mid-yield” segment (A+ to BBB-), and the upper non-investment-grade range (BB+ to BB-) where I am allowed only limited investment. I also hold emerging market and subordinated bonds to a modest extent. I hedge exchange rate risks in full.

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Rule 8: A strong hunter network with two strongholds

In order to assess both the macroeconomic environment and the value of companies in the global investment universe with the utmost care, I rely on my colleagues in our specialized Corporate Bond team who possesses immense knowledge while having one foot in Zurich and another in New York. We are seven portfolio managers and analysts in total. The criteria by which we assess the quality of the companies issuing the bonds we look at include:

financial strength and credit indicators
capital structure solidity
business model dynamism
business strategy vision
earnings stability
global competitive capability
management expertise
ability to recognize forward-looking trends
consistency across the economic cycle
resistance to unforeseen disruptions

We work like a bank’s credit department, which also conducts extensive analysis before approving an application.

Rule 9: Systematically pursue your goal

The goal of our far-reaching analysis is to identify companies that benefit from forward-looking industry trends on the one hand and, on the other, to identify inaccuracies in the valuation of bonds from the same issuer and to exploit them profitably.

Rule 10: Keep calm

I always make my investment decisions for the Vontobel Fund – Global Corporate Bond Mid Yield from a long-term perspective, and I carefully make adjustments to the portfolio if changes in the investment environment throw off the ratio of its risk and reward potential. And when unexpected world or financial market events occur, I just remember one thing: don’t panic. Experienced yield hunters stay cool and stay on the trail of their chosen prey.