Antje
Schiffler:
When
choosing
a
bond
fund
for
income
portfolio
investors
may
wonder
should
they
choose
a
bond
with
the
highest
coupon,
a
high
yield
bonds.
With
me
today
to
discuss
this
as
a
task
is
Jeana
Doubell.
She
is
analyst
with
Morningstar’s
Manager
Research
team.
Jeana,
great
to
have
you
here
and
tell
us.
Is
this
the
good
way
for
investors
to
go
about
things?
Jeana
Doubell:
Well,
an
ideal
bond
allocation
within
an
income
portfolio
isn’t
all
that
dissimilar
from
a
bond
allocation
in
a
regular
well-balanced
portfolio.
The
reason
for
this
is
because
the
most
important
function
of
bonds
in
any
portfolio
is
to
bring
stability.
They,
in
essence,
lessen
volatility
as
well
that
comes
perhaps
from
a
more
volatile
equity
allocation
in
the
same
fund.
However,
higher
bonds
carry
a
higher
credit
risk
than
regular
bonds,
and
therefore
they
are
not
necessarily
able
to
bring
the
stability
by
themselves.
So,
while
income
investors
might
tilt
their
portfolio
on
the
equity
side
to
a
higher
dividend
producing
set
of
stocks.
On
the
bond
side,
they
often
may
maintain
a
higher
allocation
to
impact
investment
grade
bonds
such
as
developed
market
government
bonds
or
high-quality
corporate
credit.
However,
modest
allocation
to
high
yield
bonds
such
as
10%,
15%
can
add
a
great
deal
of
diversification
to
the
fund
and
we
see
this
as
an
added
advantage.
Schiffler:
So,
what
do
investors
need
to
be
aware
of
when
choosing
a
high
bond
fund?
Doubell:
Well,
I
think
it’s
best
if
they
understand
the
risks.
High
yield
bonds
are
essentially
corporate
credit
bonds
that
carry
a
junk
status
rating.
This
means
that
there
are
increased
risks
when
you’re
investing
in
high
yield.
For
example,
they
may
be
issued
by
a
company
that
already
has
a
high
debt
load,
or
they
could
be
a
very
subordinated
bond
deep
within
the
capital
structure,
which
means
they
offer
less
protection
to
investors
if
something
goes
wrong
with
the
company.
In
addition
to
that,
high
yield
bonds
are
also
more
vulnerable
to
economic
pressure
than,
let’s
say,
investment
grade
bonds
or
other
types
of
bonds.
It’s
also
much
less
liquid
market
because
the
high
yield
issuers
do
not
necessarily
issue
as
much
public
information
or
it’s
not
as
freely
available
as
with
other
types
of
bonds,
such
as
government
bonds
and
because
of
this
when
the
market
is
perhaps
in
a
risk
averse
state
it
can
be
difficult
to
buy
or
sell
those
bonds
and
therefore
we’d
really
encourage
investors
that
are
looking
at
the
high
yield
to
go
in
with
a
long-term
mindset
and
to
really
stick
with
their
investments
through
an
entire
investment
cycle
to
achieve
the
best
results.
Schiffler:
So,
you
mentioned
a
lot
of
risks
already.
How
can
investors
best
manage
these
risks?
Doubell:
Well,
it
is
an
inefficient
market.
A
lot
of
the
information
as
discussed,
they
struggle
–
it’s
not
necessarily
immediately
represented
in
the
pricing
of
the
market.
So,
we
really
think
in
this
space
specifically,
it
helps
to
have
an
active
manager
because
really
good
managers
with
decent
or
a
large
team
of
resources
are
really
able
to
dive
deep
into
these
types
of
bonds
and
able
to
basically
pick
out
those
that
perhaps
have
a
higher
chance
of
a
default
risk
and
able
to
maneuver
around
them
selecting
rather
credits
that
are
much
less
likely
to
default.
Schiffler:
So,
could
you
recommend
any
actively
managed
high
yield
bond
strategies
for
an
income
portfolio?
Doubell:
Sure.
Perhaps
we
could
consider
the
HSBC
Euro
High
Yield
Bond
Fund.
This
fund
is
rated
Gold
by
our
Morningstar
analysts
and
has
been
run
by
its
veteran
manager
Philippe
Igigabel
for
almost
two
decades.
This
is
quite
impressive
as
he
started
his
career
in
high
yield
investing
more
or
less
at
the
same
stage
that
high
yield
investing
really
came
to
market
in
the
early
2000s.
So,
he
has
seen
it
all.
He
is
also
backed
by
a
large
team,
15
analysts
and
this
is
really
needed
for
them
to
follow
their
very
disciplined
process,
which
focuses
on
company
quality.
Essentially,
they
look
to
identify
those
companies
that
have
strong
fundamentals
and
are
very
unlikely
to
default,
which
minimizes
the
risk
of
high
yield
investing.
And
this
is
actually
evident
in
the
fact
that
they
have
had
no
exposure
to
default
since
2003.
I
think
this
is
really
testimony
to
how
skillful
management
of
credit
risk
can
help
a
fund
to
outperform.
On
the
other
hand,
we
have
the
Silver
rated
T.R
Price
European
High
Yield
Bond
Fund.
This
is
managed
by
Michael
Della
Vedova.
And
has
been
led
–
which
he
has
been
leading
since
2011.
He
also
has
over
25
years
of
experience.
And
while
he’s
supported
by
what
seems
like
a
small
team
at
first
with
three
dedicated
high
yield
analysts,
he
can
also
draw
in
the
support
of
a
global
high
yield
team
of
20
–
making
it
to
almost
20
analysts
in
total.
The
focus
here
is
mainly
on
bottoming
up
securities
selection
with
top-down
factors
playing
less
of
a
role.
And
the
team
basically
look
for
discounted
bonds
that
have
lower
quality
–
in
the
lower
quality
segments
of
the
market.
So,
bonds
rated
B
to
CCC.
Here
the
return
profile
can
therefore
be
more
volatile.
They
carry
slightly
more
credit
risk
however,
although
they
may
lose
more
during
a
sell-off
during
market
rallies
bonds
really
help
to
outperform.
So,
while
you
perhaps
require
stronger
stomach
with
T.R
Price’s
high
yield
fund
than
with
HSBC.
The
fund
is
definitely
well-suited
to
outperform
over
the
long-term.
Schiffler:
So,
some
excellent
recommendations
for
the
European
space.
Anything
you
can
highlight
for
the
global
spectrum?
Doubell:
Sure.
So,
on
the
global
side,
we
have
the
Gold
rated
Robeco
High
Yield
Bond
Fund.
This
is
run
by
a
duo
team,
Sander
Bus
and
Roeland
Moraal
who’ve
been
managing
the
fund
for
over
two
decades
as
well.
I
think
you
might
be
sensing
a
theme
with
our
top-rated
managers.
They
really
do
know
the
space
exceptionally
well.
This
team
is
supported
by
23
global
corporate
analysts
and
the
approach
here
centers
around
bottom-up
security
selection
with
top
down
management
playing
a
role
as
well.
They
have
a
preference
for
companies
with
solid
fundamentals,
and
this
typically
results
in
a
higher
average
credit
rating
than
some
of
their
peers
in
the
Global
High
Yield
space.
However,
decent
characteristics
have
also
helped
the
fund
perform
better
than
their
peers
during
periods
of
market
volatility
and
has
overall
helped
to
increase
the
fund
stability.
This
brings
us
back
around
to
start
of
this
conversation
where
I
mentioned
that
bonds
are
typically
added
to
a
portfolio
to
increase
its
stability,
and
while
high
yield
bonds
may
be
slightly
more
volatile
than
the
rest
of
their
bond
peers,
they
definitely
have
a
place
in
the
income
portfolio.
Schiffler:
Thank
you
so
much
for
these
recommendations,
Jeana,
and
these
insights.
For
Morningstar,
I’m
Antje
Schiffler.
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