High Yield Happenings: The fixed income allocation that doesn't behave like the rest
Key takeaways
- Historically, adding short-dated high-yield bonds to a balanced portfolio has resulted in higher total returns and lower volatility.
- In contrast to equities and long-dated bonds, returns from short-dated high-yield bonds are driven by the compounding of near-term cashflows rather than by speculation about the future.
- An allocation to short-dated high yield can act as a useful hedge and diversifier.
One question our clients often ask is where short-dated high yield 'fits' in a portfolio? Should it sit in the 'risk' bucket? In the 'fixed income' bucket? Or in a bucket of 'alternatives'? Is it only for income-seeking clients, or can it work for total-return focused clients too?
With that in mind, I thought it was worth touching on a few of the use cases for allocating to short-dated high yield in a balanced portfolio. This list isn’t intended to be exhaustive and isn’t intended to tell anyone how to do their job. But perhaps it can provide a little inspiration.
The use case I will touch on first is increasingly common given the changed yield environment over the last few years. This is using an allocation to short-dated high yield as a complement to a more conventional equity-and-bond portfolio (such as the classic 60/40 balanced portfolio). As the chart below illustrates, adding short-dated high yield to balanced portfolios of various risk weightings has historically created portfolios with lower volatility and higher total returns.
Past performance is not a guide to the future.
The chart shows returns from blended portfolios of the MSCI World and ICE BofA Global Broad Market Bond indices. The 'with SDHY' series adds a 20% allocation to the ICE BofA US 1-5yr BB-B index. Source: Artemis, Bloomberg, ICE BofA Indices from 31 December 2000 to 31 January 2026.
Conceptually, adding short-dated high yield also provides a different driver to returns. Equities and longer-term bonds inherently reflect expectations of the future (or even an expectation of what future expectations about the future will be...). But short-dated high yield is simply about the contractual obligations that companies need to meet in the near term. So investing in short-dated high-yield bonds does not mean taking big macro bets or gambling on the long term but instead receiving a series of short-term cashflows and allowing them to compound.
As we saw in 2022, government bonds have not offered the useful hedge against equity exposure that they once did. And, given the increasing concentration of equity markets, the utility of investing in assets with a completely different source and mechanism for returns is, to our minds, of even greater value today.
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CAPITAL AT RISK. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.
This is a marketing communication. Before making any final investment decisions, and to understand the investment risks involved, refer to the fund prospectus (or in the case of investment trusts, Investor Disclosure Document and Articles of Association), available in English, and KIID/KID, available in English and in your local language depending on local country registration, available in the literature library.
Risks specific to Artemis Funds (Lux) – Short-Dated Global High Yield Bond
- Market volatility risk The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
- Currency hedging risk The fund hedges with the aim of protecting against unwanted changes in foreign exchange rates. The fund is still subject to market risks, may not be completely protected from all currency fluctuations and may not be fully hedged at all times. The transaction costs of hedging may also negatively impact the fund’s returns.
- Bond liquidity risk The fund holds bonds which could prove difficult to sell. As a result, the fund may have to lower the selling price, sell other investments or forego more appealing investment opportunities.
- Higher-yielding bonds risk The fund may invest in higher-yielding bonds, which may increase the risk to capital. Investing in these types of assets (which are also known as sub-investment grade bonds) can produce a higher yield but also brings an increased risk of default, which would affect the capital value of the fund.
- Credit risk Investments in bonds are affected by interest rates, inflation and credit ratings. It is possible that bond issuers will not pay interest or return the capital. All of these events can reduce the value of bonds held by the fund.
- Derivatives risk The fund may invest in derivatives with the aim of profiting from falling (‘shorting’) as well as rising prices. Should the asset’s value vary in an unexpected way, the fund value could reduce.
- Charges from capital risk Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.
- Emerging markets risk Compared to more established economies, investments in emerging markets may be subject to greater volatility due to differences in generally accepted accounting principles, less governed standards or from economic or political instability. Under certain market conditions assets may be difficult to sell.
- Income risk The payment of income and its level is not guaranteed.
- ESG risk The fund may select, sell or exclude investments based on ESG criteria; this may lead to the fund underperforming the broader market or other funds that do not apply ESG criteria. If sold based on ESG criteria rather than solely on financial considerations, the price obtained might be lower than that which could have been obtained had the sale not been required.
Risks specific to Artemis Funds (Lux) – Global High Yield Opportunities
- Market volatility risk The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
- Currency hedging risk The fund hedges with the aim of protecting against unwanted changes in foreign exchange rates. The fund is still subject to market risks, may not be completely protected from all currency fluctuations and may not be fully hedged at all times. The transaction costs of hedging may also negatively impact the fund’s returns.
- Bond liquidity risk The fund holds bonds which could prove difficult to sell. As a result, the fund may have to lower the selling price, sell other investments or forego more appealing investment opportunities.
- Higher-yielding bonds risk The fund may invest in higher-yielding bonds, which may increase the risk to capital. Investing in these types of assets (which are also known as sub-investment grade bonds) can produce a higher yield but also brings an increased risk of default, which would affect the capital value of the fund.
- Credit risk Investments in bonds are affected by interest rates, inflation and credit ratings. It is possible that bond issuers will not pay interest or return the capital. All of these events can reduce the value of bonds held by the fund.
- Derivatives risk The fund may invest in derivatives with the aim of profiting from falling (‘shorting’) as well as rising prices. Should the asset’s value vary in an unexpected way, the fund value could reduce.
- Leverage risk The fund may operate with a significant amount of leverage. Leverage occurs when the economic exposure created by the use of derivatives is greater than the amount invested. A leveraged portfolio may result in large fluctuations in its value and therefore entails a high degree of risk including the risk that losses may be substantial.
- Charges from capital risk Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.
- Emerging markets risk Compared to more established economies, investments in emerging markets may be subject to greater volatility due to differences in generally accepted accounting principles, less governed standards or from economic or political instability. Under certain market conditions assets may be difficult to sell.
- Income risk The payment of income and its level is not guaranteed.
- Counterparty risk Investments such as derivatives are made using financial contracts with third parties. Those third parties may fail to meet their obligations to the fund due to events beyond the fund's control. The fund's value could fall because of loss of monies owed by the counterparty and/or the cost of replacement financial contracts.
- ESG risk The fund may select, sell or exclude investments based on ESG criteria; this may lead to the fund underperforming the broader market or other funds that do not apply ESG criteria. If sold based on ESG criteria rather than solely on financial considerations, the price obtained might be lower than that which could have been obtained had the sale not been required.
Risks specific to Artemis High Income Fund
- Market volatility risk The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
- Currency risk The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.
- Bond liquidity risk The fund holds bonds which could prove difficult to sell. As a result, the fund may have to lower the selling price, sell other investments or forego more appealing investment opportunities.
- Credit risk Investments in bonds are affected by interest rates, inflation and credit ratings. It is possible that bond issuers will not pay interest or return the capital. All of these events can reduce the value of bonds held by the fund.
- Charges from capital risk Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.
- Emerging markets risk Compared to more established economies, investments in emerging markets may be subject to greater volatility due to differences in generally accepted accounting principles, less governed standards or from economic or political instability. Under certain market conditions assets may be difficult to sell.
- Income risk The payment of income and its level is not guaranteed.
Important information
The intention of Artemis’ ‘investment insights’ articles is to present objective news, information, data and guidance on finance topics drawn from a diverse collection of sources. Content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or investment by Artemis or any third-party. Potential investors should consider the need for independent financial advice. Any research or analysis has been procured by Artemis for its own use and may be acted on in that connection. The contents of articles are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current opinions, expectations and projections. Articles are provided to you only incidentally, and any opinions expressed are subject to change without notice. The source for all data is Artemis, unless stated otherwise. The value of an investment, and any income from it, can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested.
