High Yield Still the Sharpest Place to Be—But For How Long?

Redington’s quarterly risk-adjusted returns report shows high yield has dominated in the short term, but risk parity was the long-term winner.

High yield bonds and leveraged loans gave the best risk-adjusted returns in the past 12 months, boosting those investors on the hunt for income-producing assets, according to research by Redington.

In the 12 months to the end of June European high yield bonds—as measured by the Merrill Lynch European High Yield index—gained 13.3% with a volatility of 2.1%, giving the asset class a Sharpe ratio of 6.46. This was by far the best risk-adjusted return of any asset class over the period, according to the consultant’s quarterly report into risk and returns.

This outstripped the risk-adjusted returns from risk parity strategies, although this sector posted the best nominal return of 25.8% over the period. US high yield bonds and US leveraged loans also gave investors a better “bang for the buck” in the past 12 months.

In its commentary alongside the research, Redington said the low spreads over government bond yields currently seen in high yield could make it difficult for the performance to be replicated. European and US high yield bonds ranked in the top five best risk-adjusted returns in the 12-month, three-year, five-year and 10-year periods covered by the research.

But flow data published by Bank of America Merrill Lynch showed $2.7 billion had been redeemed from high yield bond funds during the week to July 16 following two months of underperformance relative to US equities. This was the biggest weekly outflow from the high yield sector since August 2013.

Redington also pointed out that improved returns and low volatility across most asset classes had led to higher Sharpe ratios than normal.

Longer-term, however, risk parity continues to show the best track record on a risk-adjusted basis: Over three years the Salient Risk Parity index has risen 14.5% with a volatility of 9.3%, giving a Sharpe ratio of 1.56, the best in that period. Risk parity strategies also lead the way over 10 years.

Related content: Sharpe Parity: the New Risk Parity? & Is Volatility Too High?

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