Standard Life investment director Richard Batty believes it is better to add risk to portfolios through exposure to US high yield, rather than US equities, as the risk-return profile is more favourable.
Batty works for the idea generation team for the strategic investment group which manages absolute return funds, including the the £10bn Standard Life Investment global absolute return strategies fund.
Speaking at the Cofunds Economic forum in London last week, Batty said: “The risk premium in equities is quite high and you can argue you get paid for taking on this risk. If you look at high yield bonds, they are highly correlated with equities, but they have a third of equity beta, which means they will fall less when the market falls. ”
Batty adds that in a difficult macroeconomic environment, you may not get returns from equities, making an 8 per cent starting point for high yield a useful asset to have.
He said: “High yield is a lot lower risk and has a higher yield than equities. If US high yield delivers eight per cent and US equities yield 2.5 per cent, then you are going to be further ahead even if nothing happens. Also, in this environment, I expect equities to remain volatile.”
In the £10bn Standard Life Investment global absolute return strategies fund, the fund’s exposure to high yield includes the Standard Life global high yield fund and derivative exposure to high yield.