Chart of the Week – September 30, 2024: High yield sustainable bond funds

Observations:

• Sustainable high yield taxable bond funds delivered an average return of 1.55% in August and average total returns of 5.6% and 11.5% year-to-date and over the trailing twelve months, respectively. Those results qualified high yield funds as the third best performing category in August across the universe of sustainable taxable bond funds and the top performing category since the start of the year and over the past twelve months to August 31, 2024.
• A small category consisting of sustainable taxable funds that invest in high-yield bonds, or below investment grade or lower-quality bonds of companies that are typically subject to higher risks, based on volatility of returns, but potentially offer higher risk adjusted returns, the sustainable high yield bond funds category at the end of August consisted of 10 mutual funds and 4 ETFs, for a combined total of 30 funds/share classes with $2.8 billion in assets under management. Of these, only two funds, accounting for 8.2% of assets, are passively managed.
• Amid an economy that has so far continued to avoid a recession (in fact, Goldman Sachs economists recently lifted their prediction for third-quarter growth to 3% from 2.5% while adjusted Commerce Department G.D.P figures for 2021-2023 show a stronger economy than previously reported), with inflation trending down toward the Federal Reserve’s 2% target and investor expectations that the Federal Reserve will start cutting interest rates soon, which the central bank did on September 18th with its 50-basis point downward move, high-yield bonds have been a rewarding option for investors over the last twelve months on a risk adjusted rate of return basis. Above average returns were also realized over the intermediate-term three- and five-year time periods.
• In August, some of the best performing sustainable high yield funds delivered returns in excess of 1.6% while, over the trailing twelve months, leading funds added in excess of 12.0%. Extending the timeline beyond a year to include additional key three-and five-year time intervals, three of the highest ranked sustainable funds, based on management considerations, years in operation, performance, fund size, and expense ratio, according to Sustainable Research and Analysis, are listed below in rank order along with a brief description of their sustainable investing approaches, on top of their individual fundamental analysis:
1. RBC BlueBay High Yield Bond Fund Class I (RGHYX) and A (RHYAX) (subject to 4.25% front end sales charge). At $713.0 million in assets, this actively managed fund offered to retain and institutional investors is the largest fund in the category. The fund’s sub-adviser, RBC Global Asset Management (UK) Limit, employs a combination of sustainable approaches, including ESG integration, negative screening or the exclusion of certain sectors, issuers or practices based on ESG considerations as well as engagement for the purpose of gaining insight regarding an issuer’s ESG practices and/or improve an issuer’s ESG disclosures.
2. iShares ESG Advanced High Yield Corporate Bond ETF (HYXF). This $141.9 million passively managed ETF emphasizes issuers with favorable ESG ratings and screens out companies exposed to ESG business controversies.
3. Federated Hermes SDG Engagement High Yield Credit Class IS (FHHIX). The $80.2 million actively managed fund, available to institutional investors, invests in companies that contribute to positive societal impact aligned with the United Nations Sustainable Development Goals. It will also exclude certain companies, including, for example, companies engaged in tobacco or production of controversial weapons.