Bonds have taken a rough ride in 2003 but they can and should be part of a balanced portfolio, as they work well to reduce risk and volatility

Some figures demonstrate that high-yield bonds in particular have proved resilient under all market conditions. Bernard Deliege, manager of the Fortis L Fund Bond High Yield points to the fact that since 1986 to date US high-yields have returned an average of 9.5 per cent compared to 9.4 per cent achieved on the S&P 500. Volatility of the latter on an annual basis is 16 per cent compared to a bond figure of 7.2 per cent. This is despite a disastrous fall this year.

These results are seen by Deliege as showing that high-yield bonds have a low correlation to US Treasuries, and their lack of volatility compared to investment-grade corporate bonds means they should be included in a well diversified portfolio.

Deliege reveals that his fund manages to exclude most ‘distressed’ bonds that are seen as more equity-like to concentrate on more fixed-income-like ‘par bonds’. “The equity-like part of the universe can be useful on a tactical basis as sometimes investors can benefit from strong rallies. However, looking at long-term statistics, par bonds have returned an average of 9.7 per cent annually with a volatility of 6 per cent, whereas distressed bonds have only returned 4.4 per cent with a volatility of 20 per cent.”

Deliege says that the crucial part is to manage the bonds actively, as they can change characteristics over time from fixed-income-like to equity-like. The fund aims largely to avoid this latter segment of the market to ease investor worries.

The bond markets’ differences with equities are underlined by the manager, who says they are not so concerned by profit growth as they are by a company’s assets, cashflow and liquidity. This means that markets can perform in tougher conditions. “A company that has demonstrated that it can survive in low-growth or even negative market conditions can be a good bond investment.”

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