Lessons from 2016’s volatile high yield

Last year, active managers who picked high-yield names in the energy and raw materials sectors benefited most from the strong performance of the asset class, says Nicholas Leach, vice-president of global fixed income at CIBC Asset Management and lead manager of the Renaissance High-Yield Bond Fund.

“For many managers, especially passive managers, 2016 was a very challenging year […] because performance was driven [by] some high-beta sectors. […] But, if you were in the right sectors in 2016, you were well rewarded,” he says.

The energy and raw materials sectors “were up high double digits in the 30s and 40s.” Meanwhile, “we had some of the underperforming sectors [like] the healthcare sectors and the consumer-related sectors that didn’t experience the sell-off in 2015.”

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But, even if active managers were invested in those high-beta sectors in 2016, securities had to be picked carefully to find yield. “The dispersion of the returns was very wide. It was important to be selective in terms of your credit analysis, analyzing your relative value and picking the winners from the losers.”

If active managers picked the right names, they came out on top, says Leach. But passive managers, like those investing in ETFs, struggled. “Some of the largest indexed ETFs underperformed the market index by 250 to 350 basis points [in 2016]. These indexed ETFs are structured to match the market performance, yet over the past year, they have significantly underperformed.”

That proves how critical active management can be in the high-yield space, he says, especially “when we’re going through periods of volatility. I would say that when we structured our portfolios, we structured them to correctly price credit, and [to] identify credit risk that is mispriced by the market.”

Leach says his portfolio is “structured to overweight undervalued securities […] that we feel are mispriced and offer a level of compensation that is a premium over the credit risk that we have quantified for each one.”

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