Incorporating ESG into credit analysis

Why Jupiter for high yield bonds?

Why high yield bonds?

Getting the basics right in global high yield

WHY HIGH YIELD BONDS?

High yield bonds, or ‘non-investment grade’ bonds, are those that the major credit rating agencies rate as below BBB- or Baa3. This indicates a relatively greater risk of default compared to investment grade bonds although, as compensation for this, high yield bonds issuers typically pay larger coupons to investors. Within the context of an overall portfolio, an allocation to high yield bonds brings a variety of potential benefits such as total return potential, diversification and naturally low duration. It’s important to note, however, that like any investment high yield bonds can fall as well as rise in value and an investor’s capital is at risk.

1. Equity-like return potential at lower volatility

Global High Yield is ICE BofA Global High Yield Constrained Index, EUR Hedged, Global Equities is MSCI World Net Total Return Index, EUR HDG, Investment Grade is Global Aggregate Corporate, EUR Hedged. Statistics are computed using monthly data for the period 31.12.2001-31.03.2023. This data is updated annually. Source: Bloomberg.

This data illustrates that, on average, an investor in high yield bonds has been overcompensated for the risk they took compared to equity investing. Much of this return came from income. Active investors can generate additional alpha in the asset class by successfully avoiding defaults through detailed due diligence.

31.12.2001 - 31.03.2023

Annualised total return Volatility Sharpe Ratio

5.7% 14.4% 0.32

EQUITIES

3.3% 5.1% 0.45

investment grade

5.9% 9.4% 0.52

High yield

2. Structurally inefficient, ideal for active investment

In high yield, the maturity profile, coupon, seniority and covenants of specific issues can vary in subtle but significant ways, even among bonds from the same issuer. This is a dynamic that we believe rewards close analysis from a large and experienced credit team, as well as an active, high conviction approach to portfolio construction.

Although high yield bonds are issued by companies deemed to be in a less robust financial position than those issuing investment grade bonds, the historic default rate of high yield bonds is lower than you might think. Even during periods of high economic stress, such as 2009 and 2020, the default rate did not rise much above 10%. Global high yield percentage defaults vs percentage no defaults

3. Low historic default rates

Source: Moody’s, Jupiter, as at 31.03.23 Forecast 2023 is produced by Moody’s.

Jupiter’s Fixed Income team has a long history of investing in high yield as a cornerstone of our flagship flexible bond strategy since its inception in 2008. Our large and highly experienced team of credit analysts are dedicated to undertaking detailed due diligence on issuers and individual issues in the search for alpha. As such, the Jupiter Global High Yield Bond fund is a natural building block in our overall fixed income suite of products. Adam Darling is the fund’s Investment Manager. He began his investment career in 2000 and joined Jupiter’s fixed income team in February 2015. Prior to joining Jupiter, Adam worked at Barclays focusing on natural resource investments, he has also held roles at Société Generale and Morgan Stanley. Adam has a degree in modern history from Oxford University. The Jupiter Global High Yield Bond fund seeks to do the basics well, aiming to achieve income and capital gain over the medium to long term, largely through judicious selection of robust and attractively priced high yield credits in order to capture the risk premium of the asset class through the cycle while avoiding the defaults.

Why Jupiter for high yield bonds?

Disciplined and flexible

The fund’s investment process begins with an assessment of the global macro landscape, and incorporates detailed analysis on each issuer. The process is both holistic and highly repeatable, with the aim of ensuring appropriate fund positioning throughout the market cycle.

At least 70% must be invested in high yield corporate bonds

Typically, 100% EUR or EUR hedged

Limits to exposures outside core high yield mandate

(incl. Cocos, unrated, emerging markets)

Benchmark: ICE BofA Global High Yield Constrained

Global macro economic assessment

Top-down credit valuation analysis

Bottom-up valuation filter - Proprietary market screening tools

Fundamental credit analysis

Investment

The Jupiter Global High Yield Bond fund is not an “impact” product, but in keeping with Jupiter’s values, the approach of the wider fixed income team, and the investment managers’ own views on responsible portfolio management, ESG research is deeply embedded in the investment process.

incorporating esg into credit analysis

Identify risks and influence strategy

The investment manager views ESG factors as a crucial subset of credit risk analysis. The value of seeking to pre-empt such risks is hard to overstate; a sudden deterioration in risk factors assessed within a robust ESG framework can have potentially terminal consequences for a business.

Identify potential ESG risks ESG checklist Third party owners (Sustainalytics, Reprisk)

Team develops an analytical framework specific to each sector Price risks Develop investment themes

Collaboration on specific credit issues Governance & Stewardship Team Jupiter ESG Investment Professionals External Advisors

Managing meetings Intelligence gathering Influencing

esg tools

analytical framework

collaboration

STEWARDSHIP

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Global high yield percentage defaults vs percentage no defaults

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Adam Darling gives an overview of Jupiter’s global high yield bond strategy, how the investment process works, and how the team seek to generate alpha.

GLOBAL HIGH YIELD BOND STRATEGY

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Overview

Global High Yield Bond