Several credit managers, including the team at TwentyFour Asset Management, have been telling us recently about a particular quirk in the inclusion rules for some of the most widely-used high yield indices. In essence, they do not include high yield companies if they are headquartered in countries whose debt is rated sub-investment grade.
In practice, this has only a minor impact upon the high yield universe and has historically excluded more speculative emerging market issuance. It has, however, taken on a new dimension with the downgrades of Greece and Portugal over recent months and the overnight downgrade of Ireland by Moody’s. While still only a small part of the European credit markets, corporate bonds from these countries could be subject to technical selling from benchmark-oriented strategies if they fall out of the indices.
I should stress that we do not expect a significant longer-term impact on the high yield funds that we rate. All are inspired by bottom-up credit analysis rather than index composition and are in any case relatively light on peripheral Eurozone holdings. We must, however, be aware of the potential for price dislocation in some issues that are popular amongst investors, especially in Ireland where many global companies are headquartered. On the other hand, of course, any such volatility could also create some attractive opportunities for active managers.
by Andy McDonald
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