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more unloved than its European counterparts and this can offer an additional premium that we are happy to take .” James Klempster , deputy head of the Liontrust multi-asset team , notes that while bonds with yields of more than 5 % come with risk – most notably of the lender defaulting – current credit spreads make them look compelling . “ Clearly , higher-yielding areas of the UK high yield fixed income market need to be considered differently from low-risk issues from the government , and investors need to consider these areas of the debt market in terms of a returns driver rather than a risk reducer ,” he says . Furthermore , Klempster suggests active management in these markets is important , as following a benchmark index means becoming over-exposed to the largest debt issuers . “ There is more risk of bankruptcy in these markets , especially if economic conditions worsen by more than expected , so more cautious and active managers are recommended ,” he says . “ But such assets tend to have shorter durations – a measure of how long , in years , an investor must wait to be repaid the price of the bond – than government bonds , so this will help reduce our interest rate sensitivity , which is advantageous if yields rise .”
Share alike Given the additional level of risk that comes with high yield bonds , the obvious question that risk-on investors face is , why not just invest in equities instead ? Klempster says that as a multi-asset investor , there are benefits to using a broad suite of different asset classes , which is why he uses high yield alongside equities rather than using either asset class exclusively . Davies concedes that if he were asked the question a year ago , he would have said equities were more attractive , but today he thinks investors are better off in high yield bonds . “ Given that yields are much higher than a year ago , bond investors are being offered a good level of compensation for the uncertainty that lies ahead ,” he says .
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