Global high-yield: why income matters more than you think

Why traditional high-yield approaches fall short

Despite the appeal of high-yield, many investors struggle to unlock its full potential. For example, passive ETFs (exchange-traded funds) often underperform the index. Why? Liquidity constraints, forced rebalancing, and capturing defaults can all erode returns, particularly in less liquid parts of the market. On the other hand, some active managers fail to consistently beat benchmarks, hampered by poor credit selection, herd behaviour or the asymmetric risk profiles of their positions.

The lesson is clear: simply buying beta exposure isn’t enough. High-yield demands a more nuanced approach.

Income is the engine

Looking at the numbers, over five, 10 and 20-year periods, coupon income has accounted for close to 100% of total returns in global high-yield.

Duration plays a limited role, given the short-dated nature of the asset class, and while security selection matters, it can be a volatile – in nine of the last 20 calendar years, the return contribution from spread changes has been negative.

Income currently remains the most reliable and dominant driver of returns. For investors, this insight is critical. It suggests that strategies focused on capturing and preserving income, rather than chasing short-term price moves are better positioned to deliver consistent performance over time.

The case for going global

One way to enhance outcome potential is by broadening the opportunity set. Adopting a global approach to high-yield investing enables access to a wider range of yields and credit quality across regions. For example, emerging markets (EM) often offer higher coupons than developed markets (DM), without necessarily introducing disproportionate risk.

Through effective security selection, it’s possible to find higher-yielding, higher-coupon bonds that are issued by EM companies with stronger credit ratings than their DM counterparts. This supports a portfolio construction approach that's focused on maximising income, without the need to venture into the riskiest segments of DMs.

This global diversification can help investors achieve a better balance between income, yield and risk – reducing reliance on any single market as a source of performance.

Risk-aware diversification

Diversification is about more than simply increasing the number of holdings. It involves constructing portfolios that balanced yield, credit quality and volatility. In high-yield investing, this means resisting the temptation to chase the highest coupons at the expense of portfolio stability. Maintaining an average credit rating of BB- or higher – two notches above that of the US high-yield index – can help manage the volatility profile of a high-yield allocation.

Adding ballast through selective exposure to investment-grade bonds or US Treasuries can further stabilise volatility. Doing so provides an anchoring effect on one side of the portfolio to complement targeted risk-taking on the other.

Precision matters

Capturing income effectively requires discipline. It’s not enough to buy a basket of bonds and hope for the best – the portfolio must harvest the coupon income. Investors need robust credit research to avoid defaults, active selection to identify stable issuers, and risk controls to manage volatility. Some strategies even use optimiser-driven portfolio construction to prioritise coupon and carry, while respecting constraints on credit quality, sector exposure and liquidity.

This level of precision can make the difference between a portfolio that merely tracks the market and one that consistently converts income into total returns.

Final thoughts…

Global high-yield remains one of the most compelling segments in fixed income. However, unlocking its potential isn’t straightforward. Coupon income can consistently drive total returns, but capturing it requires more than passive exposure. A global, risk-aware approach that combines diversification, disciplined credit selection and robust risk management could help investors harness the power of high-yield without taking excessive risk.

For investors who grasp what truly drives high-yield returns, the potential is clear.