Hidden gems: The compelling case for Small Cap High Yield
The Small Cap High Yield market is not as well known or closely followed as the “traditional” market of bigger high yield issues — that’s exactly why small issues may offer high yield investors much more of what they are looking for: overcompensated credit risk, diversification and lower default rates.
This analysis uncovers compelling opportunities in Small Cap High Yield, revealing unexpected insights in a sector often overshadowed by its traditional and Large Cap counterparts. Our research, which yielded some unexpected insights, details how Small Cap High Yield presents significant opportunities for investors.
- More income | Small Cap bonds trade on average 121bp wide vs Large Cap bonds 2
- Lower default rate | Small Cap bonds have experienced a 16% lower average annual default rate than large bonds over the last two decades (3.8% vs 4.5%) 3
- Lower volatility | Large Cap bonds are much more volatile on a week-to-week basis vs Small Cap bonds (the respective annualized standard deviations of returns are 8.24% and 4.88%) 4
- Lower correlations | Small Cap bonds have lower correlation to the S&P 500 and Bloomberg Aggregate 5
Small Cap High Yield investors have benefitted from these factors for many years. So why is no one paying attention? We have our theories. But first, let’s see if the data backs up our assertions.
