Mitch Reznick, Hermes Investment Management
“We certainly agree that the rating agencies have value, but the analysis sometimes can be a bit static. It is important for us to take a more dynamic view,” Reznick told FSA.
He explained that beyond credit ratings from agencies such as Moody’s and S&P, his firm looks at a wider range of company risks such as those in operations, finance and ESG, in order to make an investment decision.
Therefore, when an agency downgrades the credit rating of a company, it does not signal an immediate sell, he said.
“We might fully agree that the ratings are about to come down. If it’s a situation where we like a name and it’s been downgraded and the spreads go a little bit wider, that would be a buying opportunity for us.
“What really matters is that the credit [instrument] is falling into the trajectory that we expect and that the spreads are moving in the direction that we expect.”
Credit rating agencies are useful when giving guidance on whether a downgrade is coming. But no ratings agency has the final word on investment decisions. “You need different perspectives in order to judge whether something makes sense,” he added.
However, Reznick said significant downgrades — particularly when a rating has been changed two or more levels — are red flags.
“The key thing for us is we should never be caught off guard by a rating agency move,” he said. “We should be able to have a sense of when the rating action is going to happen and the direction of the rating action.”
It is a rare instance that investors get off guard, but it has happened before, he said. For example, Moody’s in 2015 downgraded Sprint Communications to CAA1 from B3, which was already pretty low.
“There you had a very meaningful effect on spreads,” he said. At the time, his firm had an underweight position in Sprint.
“But there was a lot of uncertainty around the credit, and on that specific event we needed to hear more from the company about how it was going to handle its difficult liquidity situation.”
The three-year performance of one the Hermes’ four fixed income strategies versus its benchmark, according to FE data. The fund is managed by Fraser Lundie, co-head of credit.
