Three Minutes With Rob Fawn, Senior Portfolio Manager at PGIM PIC, defined benefits, retirement planning, pensions, buyout, bulk annuity

What is your outlook for global high yield returns?

Global high yield spreads have tightened YTD driving strong returns. This has been driven by markets pricing in a higher probability of a soft landing, generally solid earnings, and market technicals being supportive with continued lack of net supply, and inflows from clients, largely rotating out of equities. Looking forward, we remain excited about the total return prospects for global high yield. Technicals remain supportive, yields elevated, and defaults benign, however, spreads appear close to fair value in our view. The path of growth and inflation remain uncertain, geopolitics continues to simmer away, there are a number of elections in key geographies – all of which could bring volatility. We expect defaults to remain around current levels for the next 12 months at around 2.5%. The vast majority of the market is high quality, performing businesses, keeping defaults at these manageable levels. That said, there remains a dispersed and dislocated tail to the market – largely made up of either challenged business models, or over-levered legacy capital structures that cannot handle the new interest rate environment. In amongst this challenged group of credits, there continue to be a few carefully selected opportunities to capture equity like returns in high yield. Accordingly, we are running risk close to home, and think there remains an abundance of relative value alpha opportunities for active managers with strong credit selection skills to carefully select their overweight and underweight positions.

With global high yield at around 7.0% it continues to attract investors rotating out of equities

What makes high yield bonds an attractive option in the portfolio construct?

High yield stands out relative to other assets classes. Value has opened up after years of ultra-low interest rates. Credit is once again a reliable wealth generator, and with global high yield at around 7.0% it continues to attract investors rotating out of equities. We are seeing investors rotate out of equities into high yield for a number of reasons:

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Offering a combination of attractive yields, potential for capital appreciation, and relative stability compared with equities, this asset class is gaining traction among investors. In this video Rob Fawn, Senior Portfolio Manager of the PGIM Global High Yield Bond Fund, discusses the outlook for high yield.

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Total return prospects for global high yield are attractive, as technicals remain supportive, yields elevated, and defaults low, says Rob Fawn

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INTRODUCTION

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ESG considerations

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Investing in smaller/medium sized companies may carry higher risks than investing in larger companies. For professional investors only. The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. This is a marketing communication. The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other communications. This does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments. Issued and approved by Hermes Investment Management Limited (“HIML”) which is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. HIML is a registered investment adviser with the United States Securities and Exchange Commission (“SEC”).

What sets PGIM apart in high yield bond investing?

There are two key drivers of PGIM’s ability to deliver superior risk adjusted returns for our clients. Firstly, our scale – we are a large, well-resourced asset manager – we have around $95bn of AUM in Leveraged Finance globally, 22 dedicated PMs and Traders, around 35 Senior Analysts, and a similar number of juniors. What does that mean? We have the bandwidth to analyse almost every credit in the market – we have one of the, if not the widest funnels for idea generation. But PGIM’s true differentiator comes from our industry specialism at the Analyst and PM level. This unique construct gives us deep coverage of the entire opportunity set within each industry space, and a small specialist deal team who form the view on each credit, own the risk, and are accountable for the performance of that investment across the franchise. This construct leads to better credit decisions, quicker credit decisions, and more ownership of those decisions. It's a proven model that has driven our strong track record of generating alpha for clients over the long-term.

The PGIM difference

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Returns outlook

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Introduction

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Michael Dicks on the key contributors that underpinned PGIM Wadhwani Keynes Systematic Absolute Return Fund’s double-digit return in 2022

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Bank retrenchment coupled with regional bank pressures has continued to result in opportunities

Between 2012 and 2022, sponsors collectively contributed £200 billion in deficit reduction contributions

SCALE NEW HEIGHTS IN HIGH YIELD AT PGIMFUNDS.COM

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Firstly, high yield has the potential to generate better risk-adjusted returns than equities across the cycle. Secondly, when bond yields are higher than earnings yields, as they currently are, that outperformance potential is even more pronounced. Finally, in a world full of risk, and equities at record highs, bonds are effective shock absorbers in selloffs, especially when central banks have room to ease policy.

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Sources 1 PGIM Fixed Income, Bloomberg as of 30 September 2024 2 PGIM Fixed Income, as of 30 September 2024