Returns-Based Style Analysis of High-Yield Bonds

Abstract

We present returns-based style analysis of four high-yield (HY) bond indexes and 60 HY bond funds. It is widely accepted that HY bonds are hybrid assets, with returns sensitive to both high-grade bond returns and stock returns. Our findings show they should be viewed as part high-grade bonds, part stocks, and sometimes part cash. Consistent with theory, as the credit rating decreases from BB to B to CCC, the bond component of returns decreases from about 73% to 48%, while the stock component increases from about 22% to 52%. Furthermore, there is a strong small-cap tilt in HY bond index returns. Our results reveal substantial differences among HY bond funds. Differences across funds in style weights are consistent with differences in the funds' holdings and investment styles. Returns of funds that invest more heavily in low-quality debt are more sensitive to stocks than funds that focus on BB or better bonds. There are notable differences in the strength of the small-cap tilts. Separately, some HY bond funds are more sensitive to growth stocks, while others show a value tilt. These findings should help investors better understand their true asset allocations and better manage their portfolios.