Here's Why the High Yield Bond Run Could be Far From Done

While it has not been a home run, high yield has certainly been a hit for investors this year, especially emerging market and energy issues

While it has not been a home run, high yield has certainly been a hit for investors this year, especially emerging market and energy issues, said Gary Herbert, portfolio manager for the Legg Mason BW Alternative Credit Fund (LM) . Herbert said the best performing asset classes in his fund this year are high yield corporate bonds focused on emerging markets (EM) and the energy sector and longer duration treasury instruments. 'We pursue a barbell approach,' said Herbert. 'We have a large allocation of riskier, higher yielding assets like corporate credit on one end, and a large allocation of lower yield, low risk assets on the other end.' In terms of valuation, Herbert said the high yield market in aggregate is moderately overvalued. But the sectors and segments where he has exposure are the most discounted including the emerging markets, energy and some agency bonds. One year ago, about 70 percent of LMANX's portfolio was invested in European RMBS. Finally, Herbert said the fund maintains significant credit default swap positions on two sovereigns: Brazil and Argentina. 'We've seen significant spread tightening and we believe there is incremental spread tightening still to come, especially in Argentina,' said Herbert.