In Monday’s post, I discussed the growing popularity of high-yield bonds: four Canadian ETFs covering this asset class have appeared in the last 12 months. I explained how investment gurus Larry Swedroe and David Swensen both advise investors to avoid high-yield bonds and instead stick to safer fixed-income investments such as government bonds.
Not all portfolio managers agree with that assessment, however. Today we’ll look at two well-known index investors who believe that high-yield corporate bonds can play role in a diversified portfolio.
Richard Ferri’s All About Asset Allocation, now in its second edition, is one of my favourite books on this important subject. Ferri argues that high-yield bonds aren’t as highly correlated with equities as others believe. “Some market researchers suggest that default risk is nothing more than a type of equity risk,” Ferri writes, “and therefore adding high-yield corporate bonds to a portfolio is the equivalent of adding more equity. That argument is not entirely correct.”
Ferri explains that since the early 1980s, there have been periods where the default risk of high-yield bonds was highly correlated with equities, but also periods where the correlation was zero,