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Société par actions simplifiée (simplified private limited company) with a capital stock of 161 106 300 euros as of November 5th, 2013

Nanterre Trade Register N° 418 862 215              

APE Number: 652E

Registered Office: Tours Société Générale, 17 cours Valmy, 92800 Puteaux

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28 Feb 2020

Time to reduce your High Yield

bond risk - Part II

FOR QUALIFIED INVESTORS ONLY– This document is reserved and must be given in Switzerland exclusively to Qualified Investors as defined by the Swiss Collective Investment Scheme Act of 23 June 2006 (as amended from time to time, CISA).

In the hunt for yield, many investors have been increasing their allocation to High Yield (HY) bonds. However, higher carry comes with higher risk – and many are now exploring safer ways to invest in High Yield. We examine here two strategies for lowering the risk profile of a HY bond allocation.

In High Yield, shorter duration does not always mean lower risk 

While many investors choose to mitigate default risk by investing in short-duration HY bonds, Chart 1 shows that a higher level of credit risk seems embedded here. Using the credit spread to see the risk premium attached to different HY bond maturities, we see a higher level of credit risk for short duration compared to longer duration.

Chart 1: In High Yield, shorter duration does not always come with lower risk

Historical credit spread for US High Yield bonds (in bps)
 

Chart 1

Source: Bloomberg Barclays, Lyxor International Asset Management. Data as at 31/01/2020.
Past performance is not a reliable indicator of future returns

Table 1 below shows that duration for the 1-3Y and 0-5Y indices are significantly lower than those of the All maturity and ESG indices. Higher duration tends to magnify the impact of a spread widening.

We will assess the effects of duration and spread widening in periods of market stress on this set of indices later in this report. 

Table 1: Index facts

     table 1

*The first score is computed by giving a score of 0 to the non-rated portion while the second score is the one of the rated portion
Source: Bloomberg Barclays, Lyxor International Asset Management. Data as at 31/01/2020.

In Table 2 below, we see that applying an ESG tilt into a High Yield bond portfolio (SRI index) or an ultra-low duration constraint (1-3Y) can significantly lower the risk profile of a high yield bond portfolio (volatility, maximum drawdown). Table 2 also shows that the SRI Sustainable Index generates a similar absolute performance versus its parent index, and a higher performance versus short duration indices over the long term. 

Table 2: Performance profile of USD High Yield bond indices

Table 2

 Source: Bloomberg Barclays, Lyxor International Asset Management. Data as at 31/01/2020.
 Past performance is not a reliable indicator of future returns

An ESG tilt with Bloomberg Barclays MSCI SRI Sustainable Indices

Bloomberg Barclays MSCI SRI sustainable indices include filters based on MSCI ESG Research in index rules:

  • Minimum MSCI ESG Ratings of BBB (Issuer non-rated by MSCI ESG are excluded)
  • Exclusions based on Controversial businesses (as defined by MSCI ESG)
  • Exclusions based on business, norms, and controversies (no “Red flags”)

ESG eligibility is checked at each monthly rebalancing on the Bloomberg Barclays MSCI SRI sustainable indices

The impact of Energy on US HY bonds – and how ESG could help 

The Energy sector remains one of the largest contributors to overall defaults in US High Yield bonds, and according to Moody’s estimates will continue to do so in 2020.

Taking ESG factors into account could be a good way of reducing exposure to future risks which could lead to default.

Chart 2 shows that the ESG tilt in a High Yield bond exposure allowed for a reduced exposure to the US energy sector over the past five years. The average weight of the Energy sector has been between 11% (on the 1-3Y) and 13.5% (All maturity) on the non ESG exposures over the past five years. It has been only 7.8% in the High Yield ESG index over the same period.

 Chart 2: 5Y historical weight of the Energy sector 

chart 2

Source: Lyxor International Asset Management, Bloomberg
Data as at 31/01/2020. Past performance is not a reliable indicator of future returns.

An ESG or an ultra-low duration tilt protects value during periods of market stress

We looked at the performance of US high-yield bond indices in the global market sell-off of Q4 2018 and the 2015 Oil Market sell-off. We found that HY ESG bond indices have proved more resilient over periods of market stress, sustaining lower spread levels and better risk profiles compared to other indices.

The performance of the High Yield bond index with an ESG or an ultra-low duration tilt has proven more resilient compared to indices with a 0-5Y duration or the all-maturities index over the two periods analysed. 

Table 3: Market stress performance analysis

   table 3

 Source: Bloomberg Barclays, Lyxor International Asset Management. Data as at 31/01/2020.
 Past performance is not a reliable indicator of future returns


The lower exposure to the Energy sector of the ESG and the ultra-low duration indices has proved beneficial in comparison to the two other indices which hold a similar sector exposure.

Protect your High Yield bond allocation with Lyxor ETF

Climbing higher or reaching further takes proper preparation, especially if you’re unfamiliar with the terrain. Here we offer two unique ways to access the US high yield corporate bond markets via some less-travelled routes specifically designed to mitigate the risks they may come with. 


Risk Warning

This document has been provided by Lyxor International Asset Management that is solely responsible for its content.

Lyxor Index Fund - Lyxor BofAML $ Short Term High Yield Bond UCITS ETF - Dist, domiciled in Luxembourg (Registered Fund) is a collective investment scheme approved by the Swiss Financial Market Supervisory Authority FINMA (FINMA) as a foreign collective investment scheme pursuant to article 120 of the Swiss Collective Investment Schemes Act of 23 June 2006 (as amended from time to time, CISA) for distribution in Switzerland to non-Qualified Investors as defined in the CISA. The above mentioned Exchange Trade Fund (ETF) is listed on the SIX Swiss Exchange / BX Swiss.

Lyxor Index Fund - Lyxor USD High Yield Sustainable Exposure UCITS ETF – Acc, domiciled in Luxembourg (non-Registered Funds, and together with the Registered Funds, the Funds) is a collective investment scheme not approved by the FINMA as a foreign collective investment scheme pursuant to article 120 of the CISA for distribution in Switzerland. Accordingly, the non-Registered Funds may be offered in Switzerland exclusively to Qualified Investors as defined in the CISA and its implementing ordinance.

Financial intermediaries (including particularly, representatives of private banks or independent asset managers, Intermediaries) are hereby reminded on the strict regulatory requirements applicable under the CISA to any distribution of foreign collective investment schemes in Switzerland. It is each Intermediary’s sole responsibility to ensure that (i) all these requirements are put in place prior to any Intermediary distributing any of the Funds presented in this document and (ii) that otherwise, it does not take any action that could constitute distribution of collective investment schemes in Switzerland as defined in article 3 CISA and related regulation.

Any information in this document is given only as of the date of this document and is not updated as of any date thereafter. 

This document is for information purposes only and does not constitute an offer, an invitation to make an offer, a solicitation or recommendation to invest in collective investment schemes.  This document is not a prospectus as per article 652a or 1156 of the Swiss Code of Obligations, a listing prospectus according to the listing rules of the SIX Swiss Exchange or any other trading venue as defined by the Swiss Financial Market Infrastructure Act of 19 June 2015 (as amended from time to time, FMIA), a simplified prospectus, a key investor information document or a prospectus as defined in the CISA. 

An investment in collective investment schemes involves significant risks that are described in each prospectus or offering memorandum. Each potential investor should read the entire prospectus or offering memorandum and should carefully consider the risk warnings and disclosures before making an investment decision. 

Any benchmarks/indices cited in this document are provided for information purposes only.

This document is not the result of a financial analysis and therefore is not subject to the “Directive on the Independence of Financial Research” of the Swiss Bankers Association. 

This document does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investments in financial products. 

The Representative and the Paying Agent of the Funds in Switzerland is Société Générale, Paris, Zurich Branch, Talacker 50, 8001 Zurich. 
The prospectus or offering memorandum, the key investor information documents, the management regulation, the articles of association and/or any other constitutional documents as well as the annual and semi-annual financial reports may be obtained free of charge from the Representative in Switzerland.

In respect to the units/shares of the Funds distributed in and from Switzerland, place of performance and jurisdiction is at the registered office of the Representative in Switzerland.

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