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Sensitivity of high-yield strategies to macro factors

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Overview

The data shows the sensitivity of high-yield funds to changes in a selection of economic factors – global default spreads, global term spreads, global interest rates and global inflation. Funds that show positive sensitivity will have a positive contribution to their performance when the factor increases or expands. The charts at the top show the sensitivity of the funds to the factors, while the corresponding charts at the bottom show the monthly movements of the factors over the past five years.

IPE and PureGroup chose the five largest high-yield bond funds, in terms of USD assets, from the Morningstar database. The data includes institutional share classes only. The funds are ordered largest to smallest from left to right in the legend.

Sensitivity of high-yield products to macro-economic factors

1. Global default spreads – uses a composite of US, European and Asian BBB-AAA corporate bonds as an index to represent global default spread trends. The chart shows that the cohort has moved towards a neutral to positive sensitivity in the past 12 months. Importantly, there has been relative persistence in cohort positioning, with ACM Bernstein being the fund most positively sensitive to increasing default spreads and Goldman Sachs being neutral to the factor.

2. Global term spreads – uses a global long-term sovereign bond index yield minus the equivalent short-term sovereign bond index yield as an index to represent global term spread trends. The chart shows that the cohort has a negative sensitivity to global term spreads, meaning that they will have a positive contribution to their performance when the spread contracts, with Pimco being the most sensitive to changes in this factor. There has also been persistence in their positioning relative to each other.

3. Global interest rates – uses a composite short-term bond yield from large economies as an index to represent global interest rate trends. The chart shows that the cohort has maintained a negative sensitivity to global interest rates meaning that they will have a positive contribution to their performance in declining rate cycles and conversely negatively affected in rate-rising cycles. However, in the past 12 months there has been significant divergence from the group by JP Morgan at the upper end moving to a neutral position and Robeco moving to a greater sensitivity against interest rate rises.

4. Global inflation – uses a composite of US and European CPI as an index to represent global inflation trends. The chart shows that all of the cohort have maintained their relative positioning to each other and have trended to reduce in their sensitivity to global inflation with the lowest point July 2015 from which we have seen a steady increase. The PIMCO and ACM Bernstein products have maintained a negative sensitivity for most of the time period since Q4 2012 and the JP Morgan, Robeco and Goldman products have had either a neutral or positive sensitivity.

Sensitivity to global default spreads

Source for all data: PureGroup

Sensitivity to global term spreads

Source for all data: PureGroup

Sensitivity to global interest rates

Source for all data: PureGroup

Sensitivity to global inflation

Source for all data: PureGroup

About the model

PureGroup’s Forward Perspective Model is a macroeconomic factor model covering open-ended, closed-end and exchanged-traded products. 

The macroeconomic correlation modelling that drives the methodology was developed with US-based academics and Parala Capital, founded by Professors Russ Wermers, Allan Timmermann and Steven Goldin. Timmermann is a professor of management and finance at Rady School, University of California, and has been a visiting scholar to IMF and the Federal Reserve Board. Wermers is professor of finance and director of centre for financial policy, Smith School of Business, University of Maryland. The model was developed based on their published papers in the Journal of Financial Economics in 2006 and 2013*.

The model provides a unified approach to looking at open-ended, closed-ended exchange-traded products and captures over 8,000 investment products and additional share classes across major asset types.

The approach provides a basis for interpreting the relationship between an investment and wider economic movements. 

The model analyses an investment product’s positioning to leading economic factors such as interest rates, inflation, dividend yields and default spreads and can provide further supporting evidence for investment recommendations.

In addition, the unified model allows for peer group assessment in an efficient and repeatable manner. 

*puregroup.io/academic-research

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