Many investors think that by increasing concentration you increase the potential upside of an investment. This is true to an extent in equity investing as the theoretical upside is unlimited. However, this does not apply to fixed income as the upside of any one bond is limited to the yield and the downside is 100%. This is even more true in high yield as the risk of a default is elevated. Below, through illustrative examples, we will show that high yield concentration does not add any further upside return, increases downside risk and leads to much weaker liquidity. However, there is a sweet spot for diversification, that is you want to have enough to manage downside risk, but not too much to dilute the best ideas in the portfolio. An effective way to achieve this optimal level of diversification is through a fund.
Click here to discover how diversifying in high yield leads to lower downside risk without reducing potential upside return.