Hermes' Lundie: High yield investors in for a nasty surprise

Added 16th August 2017

The benign conditions that prompted investors to overlook investment grade fixed income in favour of high yield could soon come to an end according to Hermes’ credit specialist, Fraser Lundie.

Hermes' Lundie: High yield investors in for a nasty surprise

In the often-quoted ‘hunt for yield’, investors have stretched themselves in efforts to secure better returns on their investment but opened themselves open to more risk Lundie said.

With volatility on high yield credit generally lower than that of investment grade in recent months, investors have been complacent but Lundie, co-head of credit at Hermes, said “there is no reason to believe that this is the new normal”.

With a rise in interest rates on the cards, he warned investors it would result in a spike in volatility as compared to the lows recorded by the VIX index over the past few months.

Any rise of volatility would ultimately normalise the relationship between investment grade and high yield.

“Those investors that have stretched themselves to take on greater risk may face a range of nasty surprises. The risk of right sizing positions could put downward pressure on the market due to forced selling,” Lundie said. “At the very least, these investors are unlikely to have the dry powder to take advantage of opportunities to enter or add to positions at attractive levels should a sell-off occur.”

He stressed that over the long term, high yield would remain “emphatically” more volatile than higher quality bonds.

Lundie said: “While high-yield volatility has trended lower for several years, there is no reason to believe that this is the new normal.

“Nonetheless, investors have become complacent in their allocations to this area of the market, potentially risking oversized positions that they would be challenged to refocus in the sort of market turn that is starting to seem more likely.

“It is essential that investors actively manage the size of their allocations if they are to manage their risk effectively.”

Kames Income Hub


Vincent McEntegart, manager of the Kames Diversified Monthly Income Fund, explains how he aims to deliver a stable and sustainable income of 5% p.a.*, paid monthly, by investing in a range of asset classes

Square Mile Research

Premier Multi Asset Global Growth - Alex Farlow
Premier Multi Asset Global...

Talking Factsheets is a video service for users...

Visitor's Comments Add your comment

Add Your Comment

We won't publish your address

About Author

Louise Hill

Senior Reporter

Louise joined Portfolio Adviser in December 2016 as one of the editorial team’s news reporters based in London. Originally from Liverpool, she is an NCTJ-qualified journalist and began her career in 2014 working on local newspapers.



Investment Strategy




PA Dublin October 2017
PA Dublin October 2017

Tuesday 10 October
Westbury Hotel, Dublin

PA US 2017
PA US 2017

Tuesday 17 October
Furniture Makers' Hall

PA Channel Islands November 2017
PA Channel Islands November 2017

Tuesday 14 November
Royal Yacht Hotel, Jersey

PA Alternative Ucits November 2017
PA Alternative Ucits November 2017

Tuesday 7 November 
Furniture Makers' Hall

Sponsored Content