Fund Managers to Investors: Be Afraid

A growing number of fund managers — and a prominent U.K. consultant — are calling for investors to be vigilant about risks lurking in the high-yield market and elsewhere.


One of the biggest U.K. investment consultants has joined the chorus of fund firms warning investors about risks emanating from junk bonds in their portfolios, among other investments.

Claire Cairney, senior investment research consultant at Hymans Robertson, says her firm has been advising clients to embrace multi-asset credit funds and direct lending strategies instead, as they offer greater flexibility and protection against an environment that may become more volatile.

“You need to be cognizant of the volatility” of high-yield products, Cairney tells Institutional Investor. “We don’t have a preference for going into high-yield credit for exactly that reason.”

Cairney’s comments echo recurring warnings from asset managers that some will be wrong-footed when the recent low-volatility trend comes to an abrupt end. On Monday, Hermes Investment Management’s co-head of credit, Fraser Lundie, warned that investors had strayed into riskier assets without maintaining an appreciation for the associated risk.

[II Deep Dive: Falling Rate Expectations Push Investors to Take on Credit Risk]


“In the intermittent period of market calm, investors have been turning to high-yield bonds in the low-yield and seemingly low-risk environment,” Lundie wrote in a research note to clients. “However, the numbers that investors have used to justify these rising allocations to high-yield bonds are misleading.”Lundie wrote that in recent months the volatility of high-yield credit has been lower than that of investment-grade credit, but he stressed that the former is “emphatically more volatile” than investment grade and warned that “there is no reason to suspect this should change.”

He added that investors who have “stretched themselves to take on greater risk” may face “a range of nasty surprises.” Furthermore, this could have a negative impact on the market as a whole. “The risk of right-sizing positions could put downward pressure on the market due to forced selling,” he wrote.Lundie’s warning follows similar comments last week from DoubleLine Capital co-founder and chief executive Jeffrey Gundlach, who told Bloomberg that junk bonds and emerging markets are overvalued and that he is reducing risky assets in DoubleLine’s portfolios.

“Volatility is about to go up,” he told Bloomberg. “That’s my highest-conviction trade right now.”

The warnings are not just coming from bond fund managers. David Schofield, president of the international division of Janus Henderson’s quantitative equity-focused Intech Investment Management, tells Institutional Investor that pension funds have been increasingly seeking to “take risk off the table” because of a sustained equities rally. “This is manifesting itself in ongoing demand for low- or managed-volatility strategies which look to build in some downside protection in the event that the stock market rally runs out of steam,” he says.

Cairney says that while it is difficult to predict what will trigger a sell-off, at some point U.S. interest rates will rise and the market will enter a default cycle. She says the widening spreads that result could offer an opportunity for investors.