If the early days of 2016 is anything to go by, the outlook for global bond markets are set to be highly volatile.
Diverging monetary policies will shape markets. In December, the US Federal Reserve singalled the end of loose monetary policy with a quarter-point interest rate hike. Europe, Japan and China, however, have been lowering interest rates and have no plans for a hike.
China's growing influence on global markets and its falling currency add to the potential for more wild market swings.
High yield bonds, more commonly known as junk bonds, find themselves in an uncomfortable position. Data presented by Babson Capital Management shows that high volatility in financial markets has resulted in weakened investor confidence in the primary market of high yield bonds, with US and European high yield funds in Q3 delivering -4.86% and -3.01% respectively.
But defenders of the high yield bond market point out that Europe has higher quality bond issuers, with most holding a BB rating. On a global scale, most high yield bond issuers hold a rating of B.
Amid this volatile environment, Fund Selector Asia compares the Blackrock GF Global High Yield Bond Fund against the Alliance Bernstein Global High Yield Fund.
Luke Ng, senior vice president of research at FE Advisory Asia provides a comparative analysis.
Investment strategy review
While both firms employ a combination of bottom-up and top-down approaches when constructing their portfolios, they have significantly different investment strategies.
The Blackrock fund, led by James Keenan, uses the BofA Merrill Lynch Global High Yield Constrained Index as its reference benchmark. Ng noted that the Blackrock fund focuses on high yield bonds, with over 95% of its investments in bonds graded BB and below. When it comes to geographic preference, the Blackrock fund leans towards developed market high yield bonds.