Posted inFixed Income

BNY Mellon launches benchmark hugging high-yield bond fund

Tree Hugging

The BNY Mellon U.S. High Yield Beta Fund seeks to achieve returns similar to the Bloomberg Barclays U.S. Corporate High Yield Index over a full market cycle.

The total expense ratio of the fund is set at 0.2%, significantly undercutting the costs charged by the most US high yield bond ETFs. The iShares $ High Yield Corp Bond UCITS ETF, for example, has a TER of 0.5%.

With the launch of a US high yield bond fund aiming to replicate the returns of the broad index, BNY Mellon aims to address a long-standing problem: with the exception of late 2015, when many high-yield issuers suffered following the collapse of the oil price, most active managers just can’t beat it.

Over the past three years, actively managed US high yield bond funds have made an average annualised return of just 3.95% according to Morningstar data. This compares to an annualised return of 5.28% for the index.

“Accessing the returns of the high yield market has proven to be elusive, with asset managers struggling to keep pace with the performance of the broad market index. The fund we are introducing is more cost efficient than the competition and has an innovative approach to sourcing bonds and managing transaction costs,” said Matt Oomen, head of international distribution at BNY Mellon IM.

Track the right index

The fund is different from other index-tracking funds, says BNY Mellon, because it follows “the broad high yield market index, which provides the potential for superior results by accessing the full spectrum of high yield credits versus a more liquid subset of the broad index.”

For example, the iShares high yield bond ETF mentioned above aims to replicate the more concentrated Markit iBoxx USD Liquid High Yield Capped Index. This index historically has underperformed the wider high yield market (see chart above), and has delivered returns in line with those of active funds after fees over the past three years.

Part of the Bonhill Group.