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Are high yield’s new fans clutching at straws?

Money has poured into high yield bond funds at a rare pace over the past month but is this a sound move based on merit, or a case of return-starved investors clutching at straws?

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PA Europe

Eigen has picked the sector as one of his “highest conviction investment ideas”, based on three main points.   

Eigen said that firstly, US high yield prices are very depressed, currently nearing where they bottomed out during the tech bust, therefore creating an attractive entry point.

Secondly, he argued the underlying fundamentals look “very reasonable.” “Certainly it is true that leverage is higher than it was a few years ago, but this is only marginally the case,” he said. “Interest coverage ratios are at record high levels, so companies have the ability to service their debt very comfortably.”

The third of Eigen’s plus points is technical factors. “[These factors] have really been the drivers of high yield price weakness in recent years,” he explained. “If we look at the pattern of flows in and out of the sector, between 2010 and the midpoint of 2014 US high yield received tremendous inflows. But from that point to the middle of February of this year, nearly all of those flows had left.  It begs the question of who is left to sell at this point? Much of the so-called high yield ‘tourist’ money seeking to pick up yield has now left the sector and been flushed out,” Eigen added.

He did however caution that in his view investors still need to be selective in the companies they invest in, even with the positive factors he outlined in place.  

Making a call one way or the other on this argument could make a big difference to the returns your portfolios make in 2016. 

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