A global, active, unconstrained lens is required for fixed income investing because traditional US credit spreads over Treasury yields are historically tight, according to Darpan Harar, co-head of developed markets specialist credit and a portfolio manager for
multi asset credit funds at Ninety One.
“Now is the time to diversify away from the US to Europe and also to take advantage of opportunities in specialist, alternative credit assets such as investment grade CLOs, agency MBOs and bank debt,” he said.
The Ninety One Global Credit Income (GCI) strategy is dynamically managed, unconstrained and benchmark-agnostic, with the flexibility to invest across markets and regions.
Fund manager Harar (pictured) takes a bottom-up view to rotate into the most attractive individual securities from the entire credit universe to achieve a smoother return profile compared with traditional credit strategies.
“Investors tend to be anchored to US credit given its market weighting, but yield spreads are now the most compressed for two decades,” said Harar.
The US investment grade sector is attracting $11bn of weekly inflows, which makes it the “most crowded fixed income market”. Meanwhile, US high yield (or sub-investment grade) corporate bonds are trading at around 200 basis points which implies an accelerating default rate of less than 0.25%.
“Investors are not getting paid enough. The market is now pricing an overly optimistic scenario for high yield bonds with an extraordinarily low default rate implied,” said Harar.
Instead, investors should take advantage of opportunities from a huge dispersion in spreads across credit markets.
Harar identifies higher returns and better risk characteristics from the “smaller cousin” in Europe. Higher rated bonds are cheaper on a relative basis than the US, while there is no give-up in yield among defensive sectors compared with cyclicals.
In addition, as an active, unconstrained manager, Ninety One can tap into specialist credit sectors which are neglected by more traditional investors.
These include BBB rated CLOs, agency MBS and bank debt. Investment grade CLOs are yielding more than three-quarters of the US high yield market, while agency MBS, a large, liquid bell weather in the fixed income market, are rated AA+, yet yield only 20% less than high yield corporate bonds.
“CLOs offer attractive risk-adjusted spreads. Although they have more structural complexity, investors are well compensated for these risks,” said Harar.
They offer more income yet have no extra impairment historically, not least because they are typically backed by loans from a diverse range of sectors.
Finally, the banking sector is providing opportunities across the risk spectrum, noted Harar.
“Bank debt historically yields less than investment grade credit because it is safer and shorter duration, but since the default by Credit Suisse in 2022 the sector has suffered,” said Harar.
Dynamic, unconstrained strategies can take advantage of this and all other anomalies in the fixed income market.
