Friday, March 24, 2017

Market Musings: One Chart for Evaluating the High Yield Bond Market in Singapore

One area of controversy in the market is high yield bonds. 

A few investors I speak with are running for the exits, a lot of people waste no time in telling you that you are downright stupid for buying high yield bonds. Very few (around 2 or 3 people) are saying that while it is not the best buying opportunity (and cite July 2015 as the best) for high yield, high yield bond funds are worth a place in your portfolio.

I had written about high yield bond etfs before and here is a link to that post.

What is the outlook for high yield and how should investors position portfolios amid such mixed sentiment? 

Every picture tells a story, so I am sharing a chart that may help investors evaluate the current high yield opportunity.

Full disclosure, this post was inspired by a blog post on State Street Global Advisors who had done something similar for the US market.

Stocks and High Yield Bond ETFs diverge, but actually delivered the same returns in the last five years. In summary, while stock ETF (ES3), the Straits Times Index ETF had higher highs and lower lows, over the last five years, both have delivered virtually the same returns.

If you factor in that the yield on the high yield bond etf (O9P) is actually 7.43%, while that for the STI ETF is actually 2.97%, you would probably have benefited from holding the high yield bond ETF.

To repeat what I had said almost a year back, 

From Morningstar report

Volatility Measurements

Volatility 5.11 %
3-Yr Mean Return 7.91 %

Sharpe Ratio 1.39

The Sharpe ratio in the past three years means one has obtained 1.39 return for every dollar risked.

I do understand that Sharpe ratio is ex post and cannot be used for ex ante calculations and there is no reason to expect similar behavior in the future.

Risk Measurement 1 Year 3 Years    5 years
Standard Deviation 6.17        5.11
Positive Months        6          24       35
Negative Months        6          12       15
Worst Month       -2.44        -3.11      -20.46

I will gladly accept a worst month of 2 to 3% down for a upward slope of positive risk adjusted returns.

I am not trying to "sell" the idea of buying this ETF, all I am saying is that it seems like a reasonable risk reward scenario,

Disclaimer :- 

I am not an investment professional.

I encourage you to do your own independent "due diligence" on any idea that I write about, because I could be and probably am wrong.

Nothing written here is an invitation to buy or sell any particular stock.

At most, I am handing out an educated guess as to what the markets may do.

The market will always find a new way to make a fool out of me (and maybe, even you!).

Even the best strategies of the past fail, sometimes spectacularly, when you least expect it.

I am not immune to that, so please understand that any past success of mine will probably be followed by failures