Convertible Securities.During the quarter, convertibles outpaced equity markets and we believe convertibles’ hybrid stock-bond attributes remain compelling, given the equity market volatility we expect and our concerns about traditional fixed income securities, where sovereign bond yields are paltry to negative.
We are maintaining our focus on convertibles with balanced risk/return attributes, seeking to use short-term volatility as an opportunity to add to our favorite positions. We remain selective within the higher equity sensitive portion of the market, particularly on areas where we believe there is a smaller margin of safety in underling equity valuations.
We continue to find many opportunities within the technology sector, where we have identified securities with attractive convertible structures, solid balance sheets, strong fundamentals and favorable long-term secular growth prospects. Within the more yield-oriented section of the convertible universe, we have found opportunities in REITs and select convertible preferreds issued by banks. We have been and expect to remain underweight cyclical areas, such as industrials, energy and materials. Even in our global convertible portfolios, direct exposure to the UK and Europe has been relatively low. We are closely evaluating that exposure as well as U.S.-based positions with significant European exposure.
Although year-to-date global issuance of $38.0 billion is not as strong as it was a year ago, it remains healthy, supported by an uptick of activity in June. Of particular note, the quarter saw one of the largest convertible deals in history, issued by a Chinese internet company. Although emerging markets issuers represent a small portion of the convertible market today, we believe this recent deal represents an exciting milestone in the evolution of the global convertible market.
High Yield.Although market participants sold off “risk” assets in the two days following the Brexit vote, oil prices rallied back to close the quarter near $50, providing a continued tailwind to commodityrelated issuers. The high yield asset class was further supported by the significant decline in Treasury yields, which maintained their levels even with the late-month bounce in “risk” assets. The high yield market is now up over 15% since mid-February, which puts 2016 on pace to be the best year for the asset class since 2009.
We expect limited fundamental impact on the U.S. high yield market as a result of Brexit, given that the majority of revenues for issuers are generated in the U.S. With more than $4 trillion of euro debt trading at negative yields, the high yield asset class still offers attractive yields relative to other opportunities. Even so, increasing default rates and deteriorating fundamentals should prompt added vigilance to credit risk.
We believe security selection will be increasingly important during the months to come. Investors have historically demanded a spread above default losses well in excess of current levels, which may temper high yield returns over the next year. In this environment, we expect higher-quality, more fundamentally stable credits to outperform, and we are positioned accordingly. Rather than pursuing the highest income without regard to fundamentals,we continue to seek out attractive risk/reward opportunities, including rising stars—issuers that are positioned for an upgrade to investment grade status. (For more on our views, please see our monthly high yield snapshot.)