High yield bonds serve a key role for many fixed income investors. While many bonds provide ballast or current income to the whole portfolio, high yield gives the fixed income side of the equation that extra yield to meet investor goals. That extra yield can come with a cost, however, namely, added risk. High yield bond segments often include a heavy dose of so-called “junk bonds," with weaker credit ratings. An active investing approach to high yield could help address that risk.
Consider, for example, the outlook in 2025. Global volatility could rise due to shifting geopolitical and trade landscapes. That could impact many companies leading them into the “junk bond” credit area. Should more of those junk bond issuers default amid tightening or more difficult economic conditions, high yield bond investors could feel the hurt.
That’s where the experience of managers in active investing comes in. Active management frequently leans on fundamental research and close scrutiny of a firm’s overall financial picture. An active manager can, for instance, lean heavily into a firm offering high yield bonds if their research tells them the company’s balance sheet is solid. At the same time, those managers can avoid a particular company offering high yields if they have balance sheet or cash flow concerns.
Perhaps most important is the fundamental advantage that active management has in fixed income. Where passive funds may struggle to replicate a bond index due to bonds defaulting or being called early, active funds can adapt to maintain a certain allocation. This advantage matters, especially in a category like high yield, where maintaining a certain number of bonds in a portfolio at any given time can pose a challenge.
Capital Group Multi-Sector Income Select ETFTM (Canada), CAPM, invests in high yield corporate bonds as part of its multisector approach. In addition to securitized debt and emerging market and investment-grade corporate bonds, the strategy actively invests in high yield using bottom-up research to identify bonds with good risk-reward characteristics.