Investors hungry for yield in the fixed income market are fueling demand for high-yield investment products. Yet those risk-on strategies are no guarantee of success on new fund launches. As asset managers look to launch high-yield product strategies that play to that demand, it is more important than ever to develop a strong fund launch marketing strategy to help optimize results.
Data shows that the U.S. high-yield bond market is attracting record inflows. For the first time ever, the U.S. leveraged finance market, including the high-yield bond market and leveraged loans combined, has topped $3 trillion in size, according to the S&P Global and LCD indexes. Both of these speculative-grade debt markets have been on an extended bull run over the past decade. Debut high-yield bond issues from companies, including Michaels Stores, Inc., and Square, Inc., are on pace to set a 16-year record, with over $68 billion of debt sold as of August 17, according to S&P Global Market Intelligence’s LCD. In part, a high tide is raising all boats.
More Runway Ahead for High-Yield Products
High-yield bonds have been around since the 1970s and are often used to finance M&A deals, leveraged buyouts, and funding of capital-intensive projects. There are a number of factors driving the current investor appetite for high-yield strategies. One is simply the attractive yields they offer compared to tight spreads on investment-grade corporate bonds. For example, the S&P 500 U.S. Investment Grade Corporate Bond Index had a YTD return of -1.79% as of October 7 as compared to 4.13% on the S&P U.S. High Yield Corporate Bond Index. Eurozone high-yield bonds also have been delivering strong returns of 4+%, according to Bloomberg. In addition, investors are wary of rising interest rate risk, which is prompting some to trade out of investment-grade bonds in favor of high-yield bonds that have a lower duration or shorter term to maturity.
As a result, fund managers see more runway ahead for high-yield investment products. As Mark Durbiano, senior portfolio manager and head of high yield at Federated Hermes, recently shared with The Wall Street Journal, “Even if U.S. growth has peaked, any expansion should still support junk bonds.” Mark went on to recommend holding more high-yield junk bonds than benchmarks.
In light of this trend, Federated Hermes recently launched its Climate Change High Yield Credit Fund, a UCITS fund that was seeded by and designed in partnership with Swedish National Pension Fund AP1. Federated Hermes states that it aims to generate long-term, risk-adjusted outperformance by investing in attractive high-yield credit instruments and delivering positive impact that supports a low-carbon future. This includes CCC-rated bonds under the belief that the continued economic recovery will lead to ratings upgrades for some companies that were affected by the pandemic.
Globally, the high-yield fixed-income market is continuing to expand with new and innovative offerings. For example, Chinese manager Haitong International Asset Management has teamed up with Tabula Investment Management to launch what is believed to be one of the first ETFs to combine Asian high-yield bonds with ESG considerations. The Tabula Haitong Asia ex-Japan High Yield Corporate Bond ESG ETF is traded on the London Exchange. Haitong reportedly wanted to apply an “ESG tilt” to the high-yield index to appeal to investors in Europe and Asia that are now demonstrating stronger demand for ESG products. Such examples speak to the ongoing innovation and expansion of the high-yield fixed-income investment market.
Tips to Strengthen Your Fund Launch Marketing Strategy
Having a strong marketing and communications strategy is important for any product launch. That is even more true in the case of high-yield bond, or “junk bond” products, which go hand-in-hand with higher risk-return. Sometimes those risks are exposed with negative headlines, such as the recent liquidity crisis for Chinese developer Evergrande. Such examples make some investors more skittish of losses associated with high-yield fixed-income investment products. Another challenge is simply dealing with the stigma and negative connotations that tend to follow junk bond products.
In terms of developing an effective fund launch marketing strategy, it is important to tell the story behind the new product. Investors are hungry for yield, but they also want to be confident that they are not throwing money away on a bad investment. Develop clear messaging that explains how the product solves a problem or tackles an opportunity and what the product does that’s different. Providing clear, consistent information and succinctly describing the investment thesis—and the management team behind it—help to build trust and investor confidence.
Before you launch the fund, your key spokesperson will need to be briefed on those messages. Layering your marketing communications strategy with a solid media relations plan targeting the financial media outlets that write about fund launches and are read by your target audience will help to increase the reach of your launch. That includes trade publications, such as FundFire, Ignites, FundIntelligence and Citywire. Media placements in these publications have the added benefit of creating third-party validation when potential investors see the product in their trusted news source. However, it’s a crowded field for fund launches, so it’s critical to differentiate yourself from other competitors with journalists by taking a proactive, targeted approach to reaching out to the media that conveys a story of broader interest behind the fund launch.