Traditional fixed income markets continue to face uncertainty around interest rates, the inflation outlook, economic growth and geopolitical developments.
Just as talk of central bank easing was doing the rounds earlier this year, the energy shock stemming from the Iran conflict added another layer of unpredictability. Macroeconomic factors have a direct bearing on fixed income markets, and the high yield bond market is no exception.
However, what may surprise many investors is that high yield bonds have historically delivered returns comparable to those of many growth-oriented asset classes along with significantly lower volatility. Thus the asset class occupies a unique position in the investment landscape.
Equity like returns with much lower volatility
To maximise returns from investments in high yield bonds, credit selection is crucial due to the large investible universe and the wide dispersion in the quality of issuers. Outcomes can vary significantly depending on the choices investors make. Therefore, it’s important to identify resilient businesses and eliminate weak credits from a portfolio through detailed credit analysis.
Historically, income from bond coupons has been the largest contributor to total return in high yield as an asset class. Furthermore, returns from coupons are contractually guaranteed, although investor outcomes can vary due to factors such as inflation risk or interest rate risk. In equities, dividend income is not a given and is dependent on factors such as earnings and cash flow.
The Jupiter Global High Yield Bond fund places fundamental, bottom-up credit research at the centre of its process, assessing factors such as management quality, business model strength, cash flow generation, leverage, liquidity and refinancing risk. This disciplined approach aims to identify issuers where the risk-reward profile is attractive while avoiding credits with deteriorating fundamentals.
Security selection has been a key driver of alpha generation in our fund since inception, demonstrating how careful credit analysis can enhance returns while helping to manage default and drawdown risk.
Good portfolio construction is key to enhanced income generation
Another often-overlooked characteristic of high yield as an asset class is its relatively short duration profile, which has historically helped to limit sensitivity to interest-rate movements, constraining duration-driven price volatility.
The high yield market effectively refinances itself about every three years, meaning that bond issuers regularly replace maturing debt with new issuance. As a result, the asset class adjusts more quickly to prevailing interest rate environments than many other fixed income sectors.
This has been particularly beneficial following the sharp rise in global interest rates in the post-Covid era, which was driven by a spike in inflation caused by supply chain disruptions and pent-up demand. Longer duration fixed income such as government bonds and investment grade bonds suffered much more from the steep increase in yields from crisis-era low levels, whereas high yield fell less and bounced back quicker as coupons repriced higher.
Sub-investment grade bonds typically offer a higher yield as they are perceived as riskier than high grade bonds. However, the key question is not whether risk exists but whether investors are being adequately compensated for taking it.
Defaults in high yield?
In this context, it’s important to allay a common misconception about default risk in high yield investing. While they are an inherent feature, default rates within the broader high yield market have historically been relatively modest, in our view, – 3.72% last year and 2.05% in 2024 of global speculative grade bonds on a dollar-weighted basis, according to Moody’s (see historical default rates chart below). We have sought to reduce those defaults even further through disciplined credit research and portfolio construction, helping investors retain more of the income generated by the portfolio.
A disciplined process of credit selection can help investors avoid deteriorating credits while identifying attractive opportunities where market pricing overstates underlying risk. Investing in high yield is not about avoiding the asset class because defaults exist. It is about understanding which risks are worth taking and whether investors are being adequately compensated for those risks.
Historical default rates
The asset class has consistently provided good risk-adjusted returns over the years. Historically, the asset class has delivered returns comparable to equities, but with significantly lower volatility. Today, elevated yields provide investors with the opportunity to access attractive levels of income that are currently substantially above those available from cash or government bonds or the dividend yield available on equities. In our view, global high yield remains one of the most compelling opportunities available to income-focused investors.
Fund specific risks
- Interest Rate Risk - The Fund can invest in assets whose value is sensitive to changes in interest rates (for example bonds) meaning that the value of these investments may fluctuate significantly with movement in interest rates, e.g. the value of a bond tends to decrease when interest rates rise.
- Pricing risk - Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
- Credit Risk - The issuer of a bond or a similar investment within the Fund may not pay income or repay capital to the Fund when due.
- Derivative risk - the Fund may use derivatives to generate returns and/or to reduce costs and the overall risk of the Fund. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment.
- Contingent convertible bonds - The Fund may invest in contingent convertible bonds. These instruments may experience material losses based on certain trigger events. Specifically these triggers may result in a partial or total loss of value, or the investments may be converted into equity, both of which are likely to entail significant losses.
- Counterparty Default Risk - The risk of losses due to the default of a counterparty on a derivatives contract or a custodian that is safeguarding the fund's assets.
- ESG - Investments are selected or excluded on both financial and non financial criteria. The Fund's performance may differ from the broader market or other Funds that do not utilise ESG criteria when selecting investments.
- ESG Data - The Fund uses data from third parties (which may include providers for research, reports, screenings, ratings and/or analysis such as index providers and consultants) and that information or data may be incomplete, inaccurate or inconsistent.
- Sub investment grade bonds - The fund may invest a significant portion of its assets in securities which are those rated below investment grade by a credit rating agency. They are considered to have a greater risk of loss of capital or failing to meet their income payment obligations than higher rated investment grade bonds.
- Charges from capital - Some or all of the Fund's charges are taken from capital. Should there not be sufficient capital growth in the Fund this may cause capital erosion.
For a more detailed explanation of risk factors, please refer to the "Risk Factors" section of the Prospectus.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Important information
Marketing communication. This document is intended for investment professionals and is not for the use or benefit of other persons, including retail investors. The value of investments and income may go down as well as up and investors may not get back amounts originally invested. Exchange rate changes may cause the value of investments to fall as well as rise. This document is information only and is not investment advice. The views expressed are those of the author(s) at the time of preparation, are not necessarily those of Jupiter as a whole and may be subject to change. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Past performance does not predict future returns. Quoted yields are not a guide or guarantee of the expected level of distributions to be received. The yield may fluctuate significantly during times of extreme market and economic volatility. A glossary of terms can be found at jupiteram.com. Where a benchmark is used for comparison, it is shown for illustrative purposes only and does not imply future performance.
The Company is a UCITS fund incorporated as a Société Anonyme in Luxembourg and organised as a Société d’Investissement à Capital Variable (SICAV).
Please refer to the latest Prospectus and to the Key Investor Information Document (KIID) (for investors based in the UK) and Key Information Document (KID) (for investors based in the EU) before making any investment decision. Particularly to the sub-fund’s investment objective, characteristics including those related to ESG (if applicable), and additional risk factors.
These documents are available from www.jupiteram.com or from www.eifs.lu/jupiteram or from:
United Kingdom: Jupiter Asset Management Limited (the Investment Manager and UK Facilities Agent), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ, United Kingdom, authorised and regulated by the Financial Conduct Authority.
Information is also available on how subscriptions and redemptions can be made, and arrangements related to investor rights and complaints handling.
Unless otherwise specified in this document, The Bank of New York Mellon SA/NV, Luxembourg Branch (the Company’s Depositary and Administrator) is responsible for processing subscription, repurchase and redemption orders and making other payments to Shareholders. The Bank of New York Mellon SA/NV, Luxembourg Branch, Luxembourg Branch,2-4,Rue Eugène Ruppert, L-2453 Luxembourg, email Distributors: JupiterLUXdistributor@bny.com, email Investors: JupiterLUXinvestor@bny.com
An investment is an acquisition of shares in the fund/sub-fund, not in the fund/sub-fund’s underlying assets. The fund is subject to product governance rules under MiFID II and is intended only for specified target market categories. Issued by Jupiter Asset Management International S.A. (the Management Company and Facilities Agent), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier.
No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI/JAM HK. In Hong Kong, investment professionals refer to Professional Investors as defined under the Securities and Futures Ordinance (Cap. 571. of the Laws of Hong Kong) and in Singapore, accredited and institutional investors as defined under section 4A of the Securities and Futures Act 2001.
Issued by Jupiter Asset Management Limited, registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier.
No part of this presentation may be reproduced in any manner without the prior permission of JAM and JAMI.