James Dudnick, CFA
Senior Vice President, Lead Portfolio Manager - Income & Growth
Key Takeaways
The high yield universe appears well positioned: J.P. Morgan research shows that yields near today’s levels have historically been associated with strong returns over the ensuing 1–2 years.
Adding U.S. high yield bonds to a core fixed income allocation has historically improved risk/reward profiles, but short-duration high yield in particular can help expand the efficient frontier.
Voya’s Short Duration High Income Strategy has historically provided consistent income and strong risk-adjusted performance, outperformed core bonds with similar volatility, and delivered broad high yield bond market returns with less volatility.
Portfolio Manager Jim Dudnick discusses how, where and when to consider short-duration high yield bonds — and why the Voya Short Duration High Income Strategy is different.
Why is U.S. high yield attractive today?
Looking at the broader U.S. high yield market, we see multiple reasons why this is a compelling asset class — including its appealing yields, discount to par and support from healthy fundamentals.
Yields for the category sit well above 8% after the recent sharp rise in interest rates.1 According to a 2022 study by J.P. Morgan analyzing 35 years of performance data, this bodes well for future total returns (Exhibit 1). When high yield bonds have been in the 8–9% range, returns over the ensuing 12–24 months have historically been in the mid to high single digits, on average.
When we look at fundamentals, we also see strong support for the asset class:
- Low net leverage: Many company management teams have made debt reduction a priority in recent years,2 pushing average leverage to its lowest level in about a decade.
- Elevated interest coverage: Interest coverage in the high yield market resides just below all-time highs,3 which should help companies weather a potential economic slowdown (should one occur).
- Limited near-term maturities: Near-term refinancing obligations are low by historical standards, with only $168 billion of bonds maturing in 2024–2025.4
- Higher-quality ratings profile: Today’s high yield market includes a lower-than-normal exposure to CCC rated bonds, which have historically had higher default rates than higher-quality bonds.5
Source: J.P. Morgan. Based on J.P. Morgan Domestic High Yield Index. Performance for periods greater than one year have been annualized. Past performance is no guarantee of future results.
Why invest in the short end of the high yield market?
We see three primary benefits to investing in the front end of this asset class:
- A better risk/return ratio. The front end of the U.S. high yield market (as measured by the 1-3 Year U.S. High Yield Index) has provided comparable returns to the broader U.S. high yield market, but with significantly lower volatility (Exhibit 2).
- An expanded efficient frontier. Investors have long known that adding U.S. high yield bonds to their core fixed income allocations can improve outcomes and expand the efficient frontier. But many investors don’t know that short-duration high yield has done a particularly good job of expanding the efficient frontier (Exhibit 3).
- A compelling yield-to-duration tradeoff. Record-high new issuance and refinancing activity in 2020 and 2021 pushed coupons and interest expense down and maturities out, creating an even more compelling yield-to-duration trade-off at the short end of the U.S. high yield market (Exhibit 4).
Data: November 2009 to June 2023.
Source: Voya Investment Management, FactSet, ICE Data Services. Past performance is not indicative of future results. This statement reflects performance and characteristics for the time period shown, results over a different time period may have been more or less favorable. See index associations and additional disclosures at the end of this document. Investors cannot invest directly in an index. Index returns are presented as net returns, which reflect both price performance and income from dividend payments, if any, but do not reflect fees, brokerage commissions or other expenses of investing.
Data: November 2009 to June 2023
Source: Voya Investment Management, FactSet, ICE Data Services. Past performance is not indicative of future results. This statement reflects performance and characteristics for the time period shown; results over a different time period may have been more or less favorable. See index associations and additional disclosures at the end of this document. Investors cannot invest directly in an index. Index returns are presented as net returns, which reflect both price performance and income from dividend payments, if any, but do not reflect fees, brokerage commissions or other expenses of investing.
As of 06/30/23. Source: Voya IM, FactSet, ICE Data Services. Past performance is not indicative of future results. This statement reflects performance and characteristics for the time period shown, results over a different time period may have been more or less favorable. See index associations and additional disclosures at the end of this document. Investors cannot invest directly in an index. Index returns are presented as net returns, which reflect both price performance and income from dividend payments, if any, but do not reflect fees, brokerage commissions or other expenses of investing.
How has the Voya Short Duration High Income (SDHI) Strategy performed over time?
A key aspect of SDHI’s history is its asymmetrical return profile. It has provided attractive upside with lower risk than the broader high yield market — including less price volatility, less drawdown and lower interest rate risk. Exhibits 5 and 6 highlight the Strategy’s upside and downside participation relative to the U.S. high yield market, as well as its attractive overall risk-adjusted returns (driven largely by credit selection) compared with other fixed income segments.
As of 06/30/23. Source: Voya IM, ICE Data Services. Past performance is not indicative of future results. This statement reflects performance and characteristics for the time period shown, results over a different time period may have been more or less favorable. Composite performance inception date: 11/01/2009. The Composite represents the investment results of a group of fully discretionary portfolios managed according to the Strategy. Market participation is based on the average of monthly returns in up and down markets as determined by the respective index. Composite market participation is supplemental information to the U.S. Short Duration High Income GIPS-compliant composite presentation at the end of this document. See index associations and additional disclosures at the end of this document. Investors cannot invest directly in an index. Index returns are presented as net returns, which reflect both price performance and income from dividend payments, if any, but do not reflect fees, brokerage commissions or other expenses of investing.
As of 06/30/23. Source: Voya IM, Morningstar Direct. Past performance is not indicative of future results. Composite performance inception date: 11/01/2009. The Composite represents the investment results of a group of fully discretionary portfolios managed according to the Strategy. Composite market participation is supplemental information to the U.S. Short Duration High Income GIPS-compliant composite presentation at the end of this document. See index associations and additional disclosures at the end of this document. Investors cannot invest directly in an index. Index returns are presented as net returns, which reflect both price performance and income from dividend payments, if any, but do not reflect fees, brokerage commissions or other expenses of investing.
Where does Voya’s SDHI Strategy fit into investor portfolios?
The Strategy has historically provided consistent income and strong risk-adjusted performance compared with fixed income, outperformed core bonds with similar volatility (Exhibit 7), and delivered broad high yield bond market returns with less volatility (Exhibit 8).
As a result, one way to use SDHI is to complement an allocation to full-market high yield. The Strategy has a lower beta to the high yield market, potentially enhancing portfolio diversification by offering a narrower range of annual returns, and providing an asymmetric return profile.
SDHI can also be a good complement to a core fixed income allocation (Exhibit 9). The Strategy’s low correlation to core bonds helps diminish the magnitude of negative performance outcomes and reduces overall volatility — all while enhancing returns and improving positioning with a higher yield and a lower duration.
As of 06/30/23. Source: Voya IM, FactSet, ICE Data Services, Morningstar. Past performance is not indicative of future results. This statement reflects performance and characteristics for the time period shown, results over a different time period may have been more or less favorable. The data above is supplemental information to the U.S. Short Duration High Income GIPS-compliant composite table at the end of this document. See index associations and additional disclosures at the end of this document. Investors cannot invest directly in an index. Index returns are presented as net returns, which reflect both price performance and income from dividend payments, if any, but do not reflect fees, brokerage commissions or other expenses of investing.
Data: November 2009 to June 2023.
Source: Voya Investment Management, FactSet, ICE Data Services, Morningstar. Past performance is not indicative of future results. This statement reflects performance and characteristics for the time period shown; results over a different time period may have been more or less favorable. The performance shown above is gross and does not reflect the deduction of investment advisory fees. The data above is supplemental information to the U.S. Short Duration High Income GIPS-compliant composite table at the end of this document. See index associations and additional disclosures at the end of this document. Investors cannot invest directly in an index. Index returns are presented as net returns, which reflect both price performance and income from dividend payments, if any, but do not reflect fees, brokerage commissions or other expenses of investing.
As of 06/30/23. Source: Voya IM, ICE Data Services. Past performance is not indicative of future results. Composite performance inception date: 11/01/2009. The Composite represents the investment results of a group of fully discretionary portfolios managed according to the Strategy. Market participation is based on the average of monthly returns in up and down markets as determined by the respective index. Composite market participation is supplemental information to the U.S. Short Duration High Income GIPS-compliant composite presentation at the end of this document. See index associations and additional disclosures at the end of this document. Investors cannot invest directly in an index. Index returns are presented as net returns, which reflect both price performance and income from dividend payments, if any, but do not reflect fees, brokerage commissions or other expenses of investing.
How did the Strategy perform in 2022?
Despite market volatility, the Strategy performed well as higher interest rates pressured fixed income. High yield corporates and core bonds returned -11.2% and -13.0%, respectively, in 2022.6 By contrast, the Voya SDHI Composite declined just -4.6% (net).7 Our focus on shorter-duration issues and industries with positive business trends, along with a bias towards quality companies prioritizing the repayment of debt, helped cushion downside volatility.
Voya U.S. Short Duration High Income
Objective: Capital preservation, consistent income and liquidity
Average duration: 1.5–2.0 years
Weighted average life: 3.25–3.75 years
Typical portfolio: Invests in bonds with less than five years to maturity; avoids the added cost and complexity of derivatives, leverage, hedging and foreign currencies, and can invest up to 20% in bank loans.
Philosophy: Active management focused on in-depth industry assessment, thorough fundamental analysis, and rigorous credit research can uncover compelling investment opportunities and minimize portfolio volatility producing superior risk-adjusted performance.
Proven investment process: The bottom-up investment process combines in-depth industry assessment with thorough fundamental analysis and rigorous credit research. Emphasis is placed on relative value, disciplined trading and minimizing overall portfolio risk. This approach is predicated on minimizing the three main risks of fixed income investing — interest rate, credit and liquidity — and has enabled the Strategy to consistently meet its investment objectives.
Compelling performance track record: The U.S. Short Duration High Income Strategy has outperformed core bonds with similar levels of volatility, delivered broad high yield market returns with less volatility, and consistently provided strong risk-adjusted performance.
1 The Barclays 9-12 Treasury Index returns through December 31, 2013 and the ICE BOA 1-3 Year US Treasury Index from January 1, 2014 forward, which do not reflect the deduction of investment fees, have been provided for comparison purposes and have not been examined by independent accountants.
2 Composite 3-Yr St Dev" and "Benchmark 3-Yr St Dev" are rolling 3-year standard deviation calculations, which measure the variability of the gross-of-fee monthly performance returns for the composite and benchmark index return over the preceding 36-month period on an annualized basis. If the composite has not been in existence for at least 3 years as of a particular year-end then “N/A” will be displayed.
3 Dispersion of Portfolio Returns" presented for each annual period is based on gross-of-fees returns and is equal to the highest and lowest annual return among the portfolios that are included in the composite for the full year. If there is not at least 1 account that was in the composite for the entire year, then “N/A” will be displayed.