Most investors will broadly understand the benefits of combining assets with different attributes to reduce risk – but diversification can also be a key part of generating a consistent high income from an investment portfolio.
Capital Group UK – Global High Income Opportunities, which launched for UK investors on 18 January 2023, is designed to capitalise on two key routes to unlocking higher income from bonds.
First is diversification by country. Rising political and economic risk have created a challenging backdrop for UK investors, so greater exposure to global assets could help provide more consistent income. Markets may also be at different stages through the investment cycle: having been burnt by inflation in previous decades, for example, many emerging market central banks have been ahead of developed market counterparts when hiking interest rates in the aftermath of the pandemic.
By allocating away from the domestic market, UK investors could not only capture these opportunities but also achieve better diversification.
Building on this, a second way to unlock income is by combining asset classes in the fixed income spectrum. Capital Group UK - Global High Income Opportunities – which includes two of the highest-yielding bond markets, emerging market debt (EMD) and high yield bonds – could not only help increase the income available but could also amplify diversification benefits without taking on excessive additional risk.
A diverse and growing opportunity set of higher yielding securities
Segment sizes are for illustrative purposes only and are not representative of actual portfolio holdings.
As evidence, Capital Group’s Global High Income Opportunities strategy1 on which the UK fund is based, has consistently produced superior long-term returns compared with three underlying asset classes: high yield bonds, EMD local currency and EMD hard currency. Over the period from January 2003 to the end of 2022 the strategy’s annualised return is 7.9%2, compared with 7.3%3 from high yield corporate bonds, 6.3%4 from EM hard currency debt and 4.9%5 from EM local currency.
For UK investors still cautious about moving into different parts off the bond market, some myth busting is useful. While high yield bonds and emerging market debt may carry a higher risk than investment grade bonds, a number of misconceptions surrounding these asset classes remain.
High yield bonds were previously known as junk bonds because companies issuing this debt were typically lower quality and carried greater risk of default. Today, the high yield market is largely made up of listed mid- and large-cap companies, and 88%6 of the US high yield index is rated ‘B’ and above (the portion of the universe that typically has the lowest default risk).
With a full market value of US$1.6 trillion, it is approximately three times the size of the combined value of the UK sterling investment grade and high yield markets.7 Issuing debt in this space is seen as a permanent and normal way of financing and represents an efficient overall blended ‘cost of capital’ for many companies.
As for EMD, the perception is that these markets are higher risk with a significant chance of default; in fact, many emerging economies have lower government debt-to-GDP ratios than advanced peers, as well as lower levels of corporate and consumer debt.
Emerging market creditworthiness has also improved as they have moved towards flexible exchange rates, foreign exchange reserve accumulation, lower external deficits, and local currency debt issuance. Around 75% of local currency sovereign bonds are investment grade, while hard currency sovereign bonds have an average credit rating of BB+ (the highest credit rating for high yield bonds).8
When it comes to high yield and EMD, risks may remain higher than investment grade, but many characterisations of these markets have not kept pace with the considerable market maturation that has occurred over the past 30 years.
We continue to believe the wider choice of assets used within Capital Group UK – Global High Income Opportunities – and diversifying within these areas – may help to increase the portfolio’s capacity to deliver higher income and total returns.
High income with diversification on multiple levels
Capital Group Global High Income Opportunities strategy
Rolling 12-month results to 31 December, USD %
Past results are not a guarantee of future results.
All data as at 31 December 2022 unless otherwise stated. Sources: Capital Group, Bloomberg, JPMorgan, RIMES
1. Based on the representative account for the strategy. Before management fees and expenses. Results are based on close of market returns (T+1).
2. Index: 50% Bloomberg US High Yield 2% Issuer Cap Index, 20% JPMorgan EMBI Global, 20% JPM GBI-EM Global Diversified and 10% JPM CEMBI Broad Diversified Index. For full details of the index history of the portfolio please visit our fund centre at www.capitalgroup.com.
Past results are not a guarantee of future results. Invested capital is at risk; the fund aims to achieve a positive return over the long term although there is no guarantee this will be achieved over that or any time period.
1. The Luxembourg SICAV Capital Group Global High Income Opportunities (LUX) (inception: 7 May 1999) is referenced as a representative account for the strategy. This is intended to illustrate our experience and capability in managing this strategy over the long term.
2. Returns for a representative account for the strategy are before fees and expenses in US$ terms. Due to the availability of data for the emerging market local currency debt index (JPMorgan GBI-EM Global Diversified Total Return), we have shown all returns since its inception on 31 December 2002, to ensure consistency when comparing one asset class with another.
3. Bloomberg US Corp High Yield 2% Issuer Cap Total Return Index. Returns in US$ terms. Source: Bloomberg
4. JPMorgan EMBI Global Index. Returns in US$ terms. Source: JPMorgan
5. JPMorgan GBI-EM Global Diversified Index. Returns in US$ terms. Source: JPMorgan
6. As at 31 October 2022. Bloomberg US High Yield 2% Issuer Cap Index. Sources: Capital Group, Bloomberg, JPMorgan. Ratings based on the higher rating of S&P, Moody’s & Fitch for the highest weighted issue.
7. As at 30 November 2022. Bloomberg US High Yield – 2% Issuer Cap Index compared with Bloomberg ICE BofA Sterling Corporate Index, ICE BofA High Yield Index and ICE BofA Sterling High Yield Index. Sources: Capital Group, Bloomberg, JPMorgan
8. As at 30 September 2022. Emerging market local currency sovereign bonds represented by JPMorgan GBI-EM Global Diversified Total Return Index. Emerging market hard currency sovereign bonds represented by JPMorgan EMBI Global Diversified Index. Using BlackRock Aladdin analytics. Higher rating of S&P, Moody’s and Fitch.
This material is not intended to provide investment advice or be considered a personal recommendation.
The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
Past results are not a guide to future results.
If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
All data as at 31 December 2022 and attributed to Capital Group, unless otherwise specified.
This material, issued by Capital International Management Company Sàrl (“CIMC”), 37A avenue J.F. Kennedy, L-1855 Luxembourg, is distributed for information purposes only. CIMC is regulated by the Commission de Surveillance du Secteur Financier (“CSSF” – Financial Regulator of Luxembourg) and manages the fund(s), which is a (are) sub-fund(s) of Capital International Fund (CIF), organised as an investment company with variable capital (SICAV) under the laws of the Grand Duchy of Luxembourg and authorised by the CSSF as a UCITS. All information is as at the date indicated unless otherwise stated and subject to change.
Facilities to investors (tasks according to Article 92 of the Directive 2019/1160, points b) to f)) are available at www.eifs.lu/CapitalGroup
The list of countries where the Fund is registered for distribution can be obtained at all times from CIMC or online at www.capitalgroup.com/europe
For the OEIC fund: This material is issued by Capital Group UK Management Company Limited ("CGUKMC"), Registered office 40 Grosvenor Place, London SW1X 7GG, authorised and regulated by the Financial Conduct Authority. CGUKMC manages the fund(s), which is a (are) sub-fund(s) of Capital Group Fund (CGF), established as a UK UCITS Scheme and structured as an umbrella company (under the OEIC Regulations).
You may be entitled to compensation from the Financial Services Compensation Scheme (the ‘Scheme’). Your entitlement to compensation depends on the type of business and the circumstances of the claim.
Other important information
The information in relation to the index is provided for context and illustration only. The fund is actively managed. It is not managed in reference to a benchmark.
Investors acquire shares of the fund, not the underlying assets.
The fund(s) is (are) offered only by Prospectus, together with the UCITS Key Investor Information Document. These documents, together with the latest Annual and Semi-Annual Reports and any documents relevant to local legislation, contain more complete information about the fund(s), including relevant risks, charges and expenses, and should be read carefully before investing. However, these documents and other information relating to the fund(s) will not be distributed to persons in any country where such distribution would be contrary to law or regulation. They can be accessed online at www.capitalgroup.com/europe, where latest daily prices are also available.
The tax treatment depends on individual circumstances and may be subject to change in future. Investors should seek their own tax advice. This information is neither an offer nor a solicitation to buy or sell any securities or to provide any investment service.
A summary of Fund Shareholder Rights is available in English, French, German, Italian and Spanish at https://www.capitalgroup.com/eu/investor-rights/
CIMC may decide to terminate its arrangements for marketing any or all of the sub-funds of Capital International Fund in any EEA country where such sub-fund(s) is/are registered for sale at any time, in which case it will do so in accordance with the relevant UCITS rules.
Sign up now to get industry-leading insights and timely articles delivered to your inbox.
Hören Sie von unserem Investmentteam.
Melden Sie sich jetzt an, um branchenführende Einblicke und aktuelle Artikel in Ihrem Posteingang zu erhalten.
Ideas y tendencias de inversión de nuestro equipo de inversión.
Suscríbase a nuestra newsletter de Capital Ideas para recibir artículos con nuestras ideas y tendencias de inversión directamente en su correo electrónico.
Suivez les publications de notre équipe d’investissement.
Abonnez-vous dès maintenant pour recevoir des informations d’avant-garde et des articles d’actualité, directement dans votre boîte de réception.
Ascolta il nostro team di investimento.
Iscriviti ora per ricevere approfondimenti e articoli del settore puntualmente nella tua casella di posta.
Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.