Khan (pictured) says that default rates are at historic lows and the proportion of refinancing going towards defensive projects such as paying down debts is also low by historical standards. However, he warns that there has been a marked increase in risk-taking over the past year as a consequence of continuing financial repression, and that more companies are borrowing for speculative reasons.
"The times are certainly changing in terms of the animal spirits in boardrooms and in terms of financial repression and loose monetary policy generating increased appetite for risk," he said.
"If investors are not careful they could end up with securities which aren’t of the value they thought they were."
In recent weeks, Federal Reserve governor Jeremy Stein warned that loose monetary policy in the US had led to the early signs of a bubble begin to re-appear in the bond markets.
"It’s always tough to spot a bubble ex-ante," Khan said. "Central banks are content to clean up the mess afterwards these days."
"However, I believe the Fed governor Mr Stein was reasonably well-informed in making the observations with respect to some of the behaviour, which represents a move to a more aggressive phase, which is being aided and abetted by more expansionary monetary policy."
"However, despite the return of some bad practices to the market, we are not yet raising a red flag."
Khan explains that the cycle of expansion and contraction in the high yield market varies each time around, meaning that it is difficult to predict when the wheel will turn and to what degree.
He says that despite very strong inflows into the sector in recent months – including from sovereign wealth funds in emerging markets – the overall picture is still positive for the asset class, as long as investors are selective.
As a response to the increase in bad practices and the rising risk of defaults, he and co-manager Ian Spreadbury have built a liquidity buffer worth 12 to 14 per cent into their portfolios.
Fidelity Global High Yield was launched in March 2012 and has made 13.15 per cent over the past year compared with 12.65 per cent from the sector, according to data from FE Analytics.
Performance of fund vs sector over 1yr
Source: FE Analytics
The managers favour B rated bonds at the moment but are avoiding the more risky CCC rated issuers, in which they are underweight the index.
The high yield market is expanding both in terms of the buyers who are lured in by the yield and the sellers who are seeking financing through the markets for a number of reasons, Khan explains.
European companies are increasingly looking to the credit markets rather than banks, Khan says, as the latter are forced to reduce their debts and cut the amount they lend to meet regulatory requirements.
However, there has also been growth in the number of emerging market corporates looking to investors for financing.
So far the managers have no investments in emerging market corporate debt, but Khan says that could soon change.
"Developed world corporates have outperformed emerging market corporates by 5 to 6 per cent. We think this valuation gap is opening up some interesting opportunities."
"We are starting to look at some emerging market names that were not attractively valued last year."
"We are cautious because some of the developments we have seen in Latin American and emerging European corporates indicate limited margin for error."
The tail risk for bond investors is that governments raise interest rates. Khan says that this could happen for two reasons, which would have different consequences for investors.
"The first is benign," Khan said. "If they rise gently over 12 to 24 months because the world economy is on a sound footing, this should be a generally positive scenario for growth assets."
"If yields begin to rise, on the other hand, because of a surge in inflation and a collapse in confidence in the fiat money system, that would have different consequences."
"But clearly with the fluctuation in the price of gold, which has been seen as positive for confidence in the global monetary system, it’s probably a welcome development at least for central bankers, if not for us as well."
Khan says that the high yield market has had a good start to the year, but he still expects it to return less than in 2012.
"The overall global high yield market had returns in the mid-teens in 2012 – it was 24 per cent in Europe," he said.
"We have seen returns of 4 per cent in only four months so far this year, which is about where our expectations were in the New Year."
"We expect returns in the 7 to 8 per cent range for the year. With yields at historic lows and spreads moving through the average, we would expect a 'coupon clipping year'."
Fidelity Global High Yield requires a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.48 per cent.