European High Yield: Right Market, Right Minds, Right Moment

Right Market

The European High Yield market has matured significantly over the last 20 years. Today, it stands at over €400 billion—spread across 800 bonds from 400 unique issuers. At roughly one-third of the size of the US High Yield market, European High Yield offers active managers a broad, liquid opportunity set that warrants consideration as part of a global asset allocation.

The European High Yield index yield to worst stood at 5.5% as of May 31, 2025 (ICE BofA Euro High Yield Constrained Index), which is 100bp above its 10-year average of 4.5% and equates to a yield of approximately 7.9% once currency hedged into USD. The starting yield to worst has historically shown to be a strong predictor of future returns, as shown in Figure 1, European High Yield YTW vs. 5yr Forward Annualized Return. 

Average credit quality is higher in Europe with almost two-thirds of the market rated BB, compared to 54% in US High Yield (ICE BofA US High Yield Index), and interest rate risk is lower with an average duration of 2.6 years vs. 3.3 years. Although spreads in high yield markets are tight by historic standards, we believe that outright yields remain attractive and offer compelling long-term, risk adjusted return opportunities. 

Over the last 20 years, the European High Yield market has returned an average of approximately 6% per annum, which, when compounded, has produced a total return of 320% over the period. This compounded yield advantage more than compensates investors for default risk over the long term, as can be seen in Figure 2 comparing European High Yield vs. European Investment Grade total returns.

Average credit quality is higher in Europe with almost two-thirds of the market rated BB, compared to 54% in US High Yield (ICE BofA US High Yield Index), and interest rate risk is lower with an average duration of 2.6 years vs. 3.3 years. Although spreads in high yield markets are tight by historic standards, we believe that outright yields remain attractive and offer compelling long-term, risk adjusted return opportunities. 

Over the last 20 years, the European High Yield market has returned an average of approximately 6% per annum, which, when compounded, has produced a total return of 320% over the period. This compounded yield advantage more than compensates investors for default risk over the long term, as can be seen in Figure 2 comparing European High Yield vs. European Investment Grade total returns.

Right Minds

We believe that selecting the right team is essential to ensure a strong foundation for Polen Capital’s entry into the European High Yield market. Ben Pakenham, formerly Head of European High Yield and Global Loans at Aberdeen, will lead the strategy alongside co-manager Adam Tabor and dedicated research analysts Julien Martin and Andrew Carrie. Ben, Adam, and Julien bring more than a decade of shared experience from their time together at Aberdeen, where the team collectively managed European and Global High Yield portfolios. Their combined expertise in credit analysis, portfolio management, and research, alongside their commitment to transparency and client outcomes, make this team an ideal fit with Polen’s culture and investment philosophy.

Polen’s High Yield Philosophy

At Polen Capital, we view the high yield asset class as an area where discipline, deep research, and thoughtful risk-taking offer the potential for lasting rewards. Our strategy starts with a clear conviction: the best results come from focusing on quality—identifying fundamentally strong businesses that can weather storms and prosper over time.

We are relentless in our pursuit of idiosyncratic credit opportunities. By digging deep through bottom-up, fundamental research, we seek out underappreciated companies with resilient business models, robust cash flows, and sound governance. We believe these are the hidden gems that can deliver both attractive yields and long-term value—companies overlooked by the crowd but identified by rigorous analysis.

We don’t chase yield for yield’s sake; instead, we carefully balance opportunities for income with robust downside protection. By managing concentrated portfolios, our highest conviction ideas can more meaningfully impact performance, and we can develop a deeper understanding of our holdings through a closer engagement with the companies in which we invest.

We recognize, too, that markets do not exist in a vacuum. Macroeconomic and geopolitical events can rapidly reshape the risk landscape. That’s why our strategy is agile: a top-down, macro-overlay informs our portfolio construction—guiding our thinking on rating, sector, and duration exposure—while fundamental security selection remains our main engine of return.

Crucially, capital preservation underpins everything we do. We scrutinize legal and bond covenant frameworks as part of a truly holistic research process—protecting against downside as much as identifying upside. This blended perspective allows us to target attractive opportunities for our clients, while never losing sight of the risks.

Right Moment

We believe that the European High Yield market offers a compelling risk-return profile for long-term investors. With higher base rates still providing elevated yields, income opportunities are notably improved compared to previous years. The combination of higher yields and low duration also provides a significant cushion to total returns from rising interest rates or spreads. This higher “breakeven rate” is shown below in Figure 3. 

We also believe that the current geopolitical environment favors a diversified approach, and that Europe could represent an attractive opportunity for global investors. Even as trade tensions and tariff uncertainties swirl, Europe’s economic exposure remains limited: Goods exports to the US accounted for 3% of EU GDP in 2024 (Eurostat) and are primarily in the Pharma and Auto sectors where many European corporates already have local US manufacturing footprints.

Additionally, both monetary and fiscal levers are available to help cushion the blow from any tariff uncertainty. Inflation has already returned to target in the EU and allowed the ECB to cut rates faster than in the US, and the German economy is set to benefit from government defense and infrastructure spending packages.  Put simply, we believe an allocation to European high yield offers quality, yield, and diversification—all at a time when these attributes matter most.

In summary, today’s elevated yields, favorable starting valuations, and a competitive long-term risk/reward profile make European high yield a timely and attractive opportunity for investors seeking income and total return.

Charting a Confident Course Forward

Polen Capital’s entry into European high yield is both a natural extension of our core strengths and a strategic response to a market ripe with opportunity. By assembling a deeply experienced, collaborative team with a time-tested track record, we hope to leverage the unique qualities of Europe’s high yield landscape—high credit quality, attractive yields, and a broad, liquid  investment universe.

Anchored by disciplined, research-driven investing and a  commitment to quality and downside protection, our approach is designed to unlock compelling, risk-adjusted returns for our clients.  As global markets evolve, we believe this is the right market, with  the right team and philosophy, at the right time to deliver  meaningful outcomes and support our clients in achieving their long-term objectives.

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Definitions: 

Tenor: The tenor is the length of time remaining until a loan or bond matures and the principal is repaid. Yield to Worst: A measure of the lowest possible yield that can be received on a bond that fully operates within the terms of its contract without defaulting. The metric calculates the yield using the earliest retirement date.

ICE BofA Sterling High Yield Index (HL00): This index tracks the performance of sterling-denominated, below investment grade (high yield) corporate bonds issued in the UK market. The index includes bonds rated below investment grade from both financial and non-financial companies, providing a comprehensive benchmark for UK high yield corporates denominated in pounds sterling. It represents the broad UK high yield bond universe and is widely used to assess performance and risk characteristics of GBP high yield investments. ICE BofA Euro High Yield Constrained (HEC0): A variant of the Euro High Yield index that imposes limits on the weighting of individual issuers to reduce concentration risk, while still tracking euro-denominated high yield corporate bonds. ICE BofA US High Yield Index (H0A0): A market capitalization-weighted index comprising US dollar-denominated, below investment grade corporate debt publicly issued in the US domestic market.

Important Disclosures

This information has been prepared by Polen Capital without taking into account individual objectives, financial situations or needs. As such, it is for informational purposes only and is not to be relied on as, legal, tax, business, investment, accounting, or any other advice. Recipients should seek their own independent financial advice. Investing involves inherent risks, and any particular investment is not suitable for all investors; there is always a risk of losing part or all of your invested capital.

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