Legg Mason
Thought Leadership™
Brandywine Global
THE CASE FOR
GLOBAL HIGH YIELD
•
•
The global high yield market has grown significantly over
the past two decades, surpassing the U.S. high yield market
and in the past several years, the market has become even
more diversified, driven by the increase in high yield
issuance from European and Asian companies.
Based on our research and analysis, a global high yield
allocation has the potential to provide an investor with
equity-like returns, lower a portfolio’s volatility, improve
the overall risk-return profile, and provide potential
diversification benefits relative to both equities and
domestic high yield.
Past performance is no guarantee of future results.
All investments involve risk, including possible loss of principal.
MAR 2016
This material is only for distribution in those countries and to those recipients listed.
Please refer to the disclosure information on the final page.
IN THE U.S. – INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
Brandywine Global Investment Management, LLC
Topical Insight | March 10, 2016
The Case for Global High Yield
Equity-Like Returns with Lower Risks
We believe global high yield1 is an attractive asset class that should be considered as a permanent part
of an overall asset allocation — in place of U.S. high yield and even as a surrogate for an equity allocation.
Examining the asset class’s long-term history, global high yield has provided an attractive total return,
outpacing equities on both an absolute basis and after adjusting for volatility. Due to its income potential
and higher position in the capital structure, global high yield has generally outperformed equities during
economic downturns while retaining some upside potential during economic recoveries. Typically, high
yield allocations have been deployed on a tactical basis in response to business cycle changes. However,
given the compelling, long-term characteristics of the asset class — similar returns to equities with lower
volatility and potential diversification benefits — we contend that global high yield deserves a permanent
allocation in more risk-tolerant investment plans, replacing domestic high yield and even equity allocations.
“HE THAT LIVES UPON HOPE WILL DIE FASTING” - Benjamin Franklin
Gerhardt (Gary) Herbert, CFA
Portfolio Manager and Head
of Global Credit
Ever since the collapse of Drexel Burnham Lambert in 1990, high yield bonds have been unable to shake
the label of “junk.” In earlier years, there were certainly aggressive and highly speculative deals with
questionable business models and insufficient cash flow to service debt. However, the asset class has
matured during the past 25 years and has delivered attractive risk-adjusted returns over the long run.
Far from junk, it is time to change the perception of high yield bonds, in our opinion.
Brian L. Kloss, JD, CPA
Portfolio Manager and Head
of High Yield
Investors face an age of increased volatility and correlations2 driven by a highly politicized and
deleveraging3 world. This protracted deleveraging process in both public and private markets will weigh
on global growth, and the search for income and diversification will be of utmost importance for investors.
In this time of elevated volatility and high probability for tail risks4, we believe the global high yield asset
class provides an attractive proposition for long-term investors. Based on our analysis of historical returns,
a permanent allocation in global high yield bonds can even replace an equity allocation within an overall
portfolio — with the potential to decrease overall risk without sacrificing return.
GROWTH OF THE GLOBAL HIGH YIELD ASSET CLASS
Figure 1 Number of High Yield Issues Outside of the U.S. Continues
to Grow as the Market Develops As of December 31, 2015
4,250
3,750
Number of Issues
The global high yield market
has grown significantly
over the past two decades,
surpassing the U.S. high
yield market. Since 2000,
the asset class’s outstanding
value has increased by over
$1.3 trillion to $2.35 trillion.
In the past several years, the
market has become even
Middle East & Africa
Europe
Asia Pacific
Americas-Ex U.S.
United States
3,250
2,750
2,250
1,750
1,250
750
1999
2001
2003
2005
2007
2009
2011
2013
2015
Sources: Bank of America Merrill Lynch, Brandywine Global Investment Management. This information
is provided for illustrative purposes only and does not reflect the performance of an actual investment.
Regina G. Borromeo
Portfolio Manager and Head
of International High Yield
Michael Arno, CFA
Research Analyst
Renato Latini, CFA
Research Analyst
The Case for Global High Yield | p2
Brandywine Global Investment Management, LLC
Topical Insight | March 10, 2016
more diversified, driven by the increase in high yield issuance from European and Asian companies (see Figure 1). The expanded and compelling global
opportunity set suggests investors look more broadly to global high yield rather than limit portfolio allocations to only domestic issues.
GLOBAL HIGH YIELD MAY PROVIDE MORE ATTRACTIVE TOTAL RETURNS THAN U.S. HIGH YIELD AND EQUITIES
Over the long term, global high yield bonds have historically provided equity-like returns with lower volatility. The following table highlights the
global high yield asset class’s outperformance versus U.S. high yield and equities across multi-year periods.
Performance (%)
As of December 31, 2015
RETURN
Barclays Global High Yield
1 YEAR
3 YEARS
5 YEARS
10 YEARS
15 YEARS
20 YEARS
-2.72
1.45
5.19
7.29
8.38
8.07
-4.47
1.69
5.04
6.96
7.59
6.75
S&P 5007
1.38
15.13
12.57
7.31
5.00
8.19
Russell 20008
-4.41
11.65
9.19
6.80
7.27
8.03
5
Barclays U.S. Corporate High Yield6
Furthermore, the performance of the global high yield asset class has a significantly lower standard deviation relative to equities. As seen in the
table and chart below, the standard deviation9 of the Barclays Global High Yield Index is consistently less than either the S&P 500 Index or the
Russell 2000 Index and similar to the Barclays U.S. Corporate High Yield Index in every time period over the last 20 years (see Figure 2).
Standard Deviation (%)
As of December 31, 2015
Barclays Global High Yield
1 YEAR
3 YEARS
5 YEARS
10 YEARS
15 YEARS
20 YEARS
6.13
5.68
7.24
11.22
10.41
10.18
Barclays U.S. Corporate High Yield
6.14
5.26
6.20
10.54
9.98
9.07
S&P 500
13.08
10.47
11.60
15.00
14.97
15.29
Russell 2000
13.87
13.96
15.81
19.70
19.46
19.89
Intuitively, these results produce higher risk-adjusted performance for global high yield bonds compared to either equity index (see Figure 3).
Sharpe Ratio10
As of December 31, 2015
1 YEAR
3 YEARS
5 YEARS
10 YEARS
15 YEARS
20 YEARS
Barclays Global High Yield
-0.45
0.25
0.71
0.55
0.66
0.55
Barclays U.S. Corporate High Yield
-0.73
0.31
0.80
0.55
0.61
0.48
S&P 500
0.10
1.44
1.08
0.41
0.23
0.38
Russell 2000
-0.32
0.83
0.58
0.29
0.30
0.28
Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is
provided for illustrative purposes only and does not reflect the performance of an actual investment.
Figure 2 Rolling 10-Year Annualized Standard Deviation
20 December 31, 2015
As of
Figure 3 Rolling 10-Year Annualized Sharpe Ratio
As of December 31, 2015
Rolling Ten Yr Annualized Sharpe Ratio (%)
Rolling Ten Yr Annualized Std Dev (%)
18
16
14
12
10
8
6
Barclays Global High Yield Index
S&P 500 Index
4
2
0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: Bloomberg L.P. Past performance is no guarantee of future results. Indexes
are unmanaged, and not available for direct investment. Index returns do not include fees
or sales charges. This information is provided for illustrative purposes only and does not
reflect the performance of an actual investment.
1.0
Barclays Global High Yield Index
S&P 500 Index
0.8
0.6
0.4
0.2
-0.0
-0.2
-0.4
-0.6
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: Bloomberg L.P. Past performance is no guarantee of future results. Indexes are
unmanaged, and not available for direct investment. Index returns do not include fees or sales
charges. This information is provided for illustrative purposes only and does not reflect the
performance of an actual investment.
The Case for Global High Yield | p3
Brandywine Global Investment Management, LLC
Topical Insight | March 10, 2016
The global high yield asset class’s attractive total return has been driven by both interest income received from coupon11 payments and the value
derived from its higher position in the capital structure. Bonds have a more senior claim to the assets of a company when compared to the claim
of an equity stakeholder. The interest income (or carry) and the ultimate recovery value in the event of default help protect bondholders in
cyclically difficult years. Additionally, global high yield has demonstrated similar total return upside capture in cyclically strong periods due to the
combination of price appreciation and coupon payments.
ALWAYS AN ALLOCATION TO EQUITIES, SO WHY NOT IN GLOBAL HIGH YIELD?
Global high yield bonds may offer an attractive trade-off to investors relative to both domestic high yield and equities, with a hybrid risk-return
profile that combines characteristics of both fixed income and equities. The graph below shows the total return of certain indices against the
standard deviation of returns for those same indices from January 1, 1990 through December 31, 2015 (see Figure 4).
Figure 4 Total Return of Indices vs Standard Deviation of Indices
1995-2015
% Return (Annualized)
10
BARCLAYS
GLOBAL HIGH YIELD
8
S&P 500
RUSSELL
2000
BARCLAYS
U.S. CORPORATE HIGH YIELD
6
4
BARCLAYS
U.S. CORPORATE
INVESTMENT GRADE12
BARCLAYS GLOBAL
TREASURY13
5
10
15
Standard Deviation (Annualized)
20
Results displayed in U.S. Dollar (USD). Data Frequency Used: Monthly. Source: eVestment. Past
performance is no guarantee of future results. Indexes are unmanaged, and not available for
direct investment. Index returns do not include fees or sales charges. This information is provided
for illustrative purposes only and does not reflect the performance of an actual investment.
During this period, the Barclays Global High Yield Index showed a relatively more attractive risk-return profile when compared to the Barclays U.S.
Corporate High Yield Index, S&P 500 Index, and Russell 2000 Index. A return correlation matrix over the same period shows high yield correlations
of 0.68 with the S&P 500 Index and 0.67 with the Russell 2000 Index. The correlation of global high yield bonds with the Russell 2000 Index, we
think, persuasively makes the argument for an allocation to global high yield bonds as a substitute for equities.
Correlation Matrix
1995-2015
BARCLAYS
GLOBAL HIGH
YIELD
RETURN
BARCLAYS
US CORPORATE
HIGH YIELD
S&P 500
RUSSELL 2000
BARCLAYS US
CORPORATE
INVESTMENT
GRADE
Barclays Global High Yield
1.00
Barclays U.S. Corporate High Yield
0.93
1.00
S&P 500
0.68
0.62
1.00
Russell 2000
0.67
0.63
0.81
1.00
Barclays U.S. Corporate Inv. Grade12
0.53
0.53
0.22
0.16
1.00
Barclays Global Treasury
0.20
0.13
0.06
0.02
0.54
13
BARCLAYS
GLOBAL
TREASURY
1.00
Source: eVestment. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales
charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
The Case for Global High Yield | p4
Brandywine Global Investment Management, LLC
Topical Insight | March 10, 2016
Even with the high correlation to equities, the attractive risk-return profile supports the addition of global high yield bonds within the context of an
entire portfolio allocation, in our opinion. Typical asset allocation models include 30%–40% allocations to fixed income and 60%–70% allocations
to equities. The chart below shows the effect of decreasing equity exposure and increasing global high yield exposure in 10% increments over the
period of January 1995 through December 2015. When evaluated against historical results as part of an aggregate portfolio allocation, reallocating
a portion of equities to global high yield bonds could improve the overall risk-return profile (see Figures 5 and 6).
Figure 6 Decreasing Equity Exposure; Increasing High Yield Exposure
2005 - 2015
9.0
8.0
8.5
7.5
BARCLAYS GLOBAL
HIGH YIELD 0% /
S&P 500 100%
BARCLAYS GLOBAL
HIGH YIELD 100% /
S&P 500 0%
8.0
S&P 500 - RETURN PER
UNIT OF RISK
7.5
Annual Return (%)
Annual Return (%)
Figure 5 Decreasing Equity Exposure; Increasing High Yield Exposure
1995 - 2015
BARCLAYS GLOBAL
HIGH YIELD 100% /
S&P 500 0%
BARCLAYS GLOBAL
HIGH YIELD 0% /
S&P 500 100%
BARCLAYS GLOBAL
HIGH YIELD RETURN PER
UNIT OF RISK
7.0
S&P 500 - RETURN PER
UNIT OF RISK
6.5
BARCLAYS GLOBAL
HIGH YIELD - RETURN PER
UNIT OF RISK
7.0
8
10
12
14
16
18
Risk (Std Dev %)
Source: Bloomberg L.P. Past performance is no guarantee of future results. Indexes are
unmanaged, and not available for direct investment. Index returns do not include fees or sales
charges. This information is provided for illustrative purposes only and does not reflect the
performance of an actual investment.
6.0
8
10
12
14
16
18
Risk (Std Dev %)
Source: Bloomberg L.P. Past performance is no guarantee of future results. Indexes are
unmanaged, and not available for direct investment. Index returns do not include fees or sales
charges. This information is provided for illustrative purposes only and does not reflect the
performance of an actual investment.
CONCLUSION: GLOBAL HIGH YIELD AS A CORE PORTFOLIO ALLOCATION
While there is a long-held belief that the high yield asset class should be used tactically in portfolio allocation, our analysis shows otherwise.
We believe that an allocation to high yield — and specifically to global high yield — could be a permanent, core component of an investor’s
asset allocation model. Based on our research and analysis, a global high yield allocation has the potential to provide an investor with equity-like
returns, lower a portfolio’s volatility, improve the overall risk-return profile, and provide potential diversification benefits relative to both equities
and domestic high yield. The lower risk profile of the global high yield asset class versus equities makes intuitive sense, as the bond investor’s
return stream is better defined than the equity investor’s return stream. Bond investors earn a contractual, predefined income stream from coupon
payments and, in a default situation, bond investors are senior in the capital structure. If recovery rates and loss-adjusted default probabilities
remain within ranges consistent with historical experience, investors have the potential to be well compensated for maintaining a permanent
allocation to global high yield debt from both an absolute and risk-adjusted perspective.
INVESTMENT RISKS
High yield bonds are subject to increased risk of default and greater volatility due to the lower credit quality of the issues.
U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees
the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities
issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S.
government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses
resulting from declines in the market value of these securities.
Diversification does not assure a profit or protect against market loss.
Outperformance does not imply positive results.
Yields represent past performance and there is no guarantee they will continue to be paid.
The Case for Global High Yield | p4
Brandywine Global Investment Management, LLC
Topical Insight | March 10, 2016
ENDNOTES
1
High yield, or below-investment grade bonds are those with a credit quality rating of BB or below.
Correlation is a statistical measure of the relationship between two sets of data. When asset prices move together, they are described as positively
correlated; when they move opposite to each other, the correlation is described as negative or inverse. If price movements have no relationship to each
other, they are described as uncorrelated.
2
3
Deleveraging refers to decreasing financial leverage; most often via paying off existing debt.
4
Tail risk is a form of portfolio risk that arises when the possibility that an investment will move more than three standard deviations from the mean
is greater than what is shown by a normal distribution.
5
The Barclays Global High-Yield Index provides a broad-based measure of the global high-yield fixed income markets.
6
The Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt, including corporate and
non-corporate sectors.
7
The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.
8
The Russell 2000 Index is an unmanaged list of common stocks that is frequently used as a general performance measure of U.S. stocks of small
and/or midsize companies.
9
Standard deviation is a statistic used as a measure of the dispersion or variation in a distribution, or dataset, from its mean, or average; it measures
the volatility of an investment’s return over a particular time period; the greater the number, the greater the volatility.
10
Sharpe ratio is a risk-adjusted measure of investment return. The higher the Sharpe ratio, the better the fund's historical risk-adjusted performance.
11
Coupon is the periodic interest payment made to the bondholders during the life of the bond.
12
The Barclays U.S. Corporate Index is the corporate component of the U.S. Credit index, which is part of the Barclays Capital U.S. Aggregate Bond Index.
13
The Barclays Global Treasury Index is the sovereign component of The Barclays Global Aggregate Index, which provides a broad-based measure of the
global investment-grade fixed income markets
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