Best Return vs Risk Over The Last 5 Years?

Canadian High Yield Bonds

Stock markets receive most of the media attention when it comes to retail investing. The retail investing public has been long conditioned to believing that owning shares in a company is the best way to invest. 

What many don't necessarily realize is that owning those shares has a lot more risk involved than what they may be lead to believe.

In the chart above, the S&P 500 (SPX) returned almost 14% annually over the last 5 years (compound, absolute return). However, if you consider the potential for a downside move in that index (by 1 standard deviation from the mean), it is in fact the riskiest of the asset classes in the above chart (over that 5 year time period) by a factor of about 10. In essence, that is telling us that in a one year time frame, most of the potential for return could  possibly be wiped out by a significant market correction like what occurred in February and March of this year. Therefore the return per unit of risk taken is 1.38 (return/risk). The SP/TSX had a 5 year return per unit of risk taken of 0.90.

This is what we mean when we discuss "risk-adjusted" returns, which looks not only at the absolute return, but also the relative return to the amount of risk that you take.

By comparison, the Canadian High Yield bond index (C$HY), with a compound annual average return (over 5 years) of  5.36%, has a much safer risk profile and as a result a return per unit of risk taken of 1.43. A better risk-adjusted return than the S&P 500.

In the capital structure of a corporation, bondholders get preference to stock (common shares) holders in the event of a liquidation:

You can add that to the list of positive attributes for high yield bonds.

One more reason to own them : Canadian High Yield bonds have 0 correlation to interest rates (none, nada, zilch!).

When government bond prices are falling because interest rates are rising, that is not going to impact Canadian High Yield bonds. That is what we mean by non-correlated assets. Stocks and bonds may go up and down, but that has little impact on how Canadian High Yield bonds perform. That means they are company specific and as long as we are doing our research on the companies that we own, we should be able to manage that risk.

This is some of the added value that our High Rock expertise in Canadian High Yield bonds allows us to bring to the table for our Private Clients.

Our balanced portfolios have much broader diversification.

And that is how we are able to achieve our strong risk-adjusted returns.

As you know, past performance is not a guarantee of future returns (anybody who tells you otherwise will be seriously offside with the regulators). However, at High Rock we work darn hard to get our clients the best possible risk-adjusted returns.