BlackRock declares high yield story is over

BlackRock declares high yield story is over

Investors should be wary of focusing too much on high yield in the bond and equity markets, according to two fund managers at BlackRock.

Speaking on a panel discussion at BlackRock’s offices in London, Tim Webb, head of the Emea/Apac and global alpha fixed income group, said there has been rush for high bond yield in the poor economic environment.

“There has been a grab for yield as investors are finding it difficult to find yield in the safer government bond markets. we are a little wary of the high yield market. Pension funds have large deficits and everyone is looking for high yield but I believe this market is beginning to look a little too crowded."

Webb pointed towards what he called the “shoot first, ask questions later” attitude to taking risk in the financial markets, adding that BlackRock is instead focusing more on relative value than taking huge directional bets.

Stuart Reeve, portfolio manager for global equities at BlackRock, said something similar is happening in the equities market, where high dividend yields are becoming more attractive due to the zero interest rate policy and zero yield environment.

“The issue is that people looking for income are used to just looking for yield. But you should not only focus on the level of dividend yield that companies provide. The way to success is not to buy the highest yielding stocks you can find and expect them to deliver great returns and income.

Reeve said that looking at a company’s future growth is just as important as looking at yield.

“Over time, the vast majority of your equity return is explained by a combination of yield and growth, and almost none of your return is explained by the changed in the PE rating of the stock. If you are a dividend or equity investor looking for returns that are going to increase in dollar or sterling over time, you need to know the companies have cash to be able to pay for it.”

“So some companies can grow but 100% of their cash flow has to be reinvested back into their business in order to grow while other companies have to reinvest relatively little of their cash flow.”

Reeve said healthcare companies, for example, are in a better position than telecoms and utilities companies because the latter are "not necessarily in a position to maintain their dividend yield as their flow coverage is not strong enough".