Building better portfolios with global corporate credits
Portfolio Managers Daniel Siluk and Addison Maier explain how investors can fortify bond allocations by seeking out the unique market structures and pricing differentials available in the global corporate credit market.
8 minute read
Key takeaways:
- Investors often overlook the global nature of the corporate credit market, causing them to miss out on the possibility of enhancing returns per unit of risk.
- By expanding beyond their home market, investors can uncover compelling credit stories and unique market structures that can lead to more defensible business models and improved credit quality for issuers.
- Credits issued by the same company in a range of currencies can have vastly different return profiles, and astute investors can capitalize on this phenomenon while hedging away unwanted currency risk.
A multi-year stretch of largely synchronous global fixed income markets is coming to an end, and investors have some decisions to make. The COVID-19 pandemic, inflation, and the policy responses to each left many investors feeling like they had little choice but to allocate within the narrow confines dictated by this extraordinary environment. Now, as the trajectories of major economies and policy prescriptions diverge, investors can cast a wider net with the objective of once again fortifying a broader portfolio with fixed income’s ability to deliver steady income, diversification to riskier assets, and low volatility.
When determining the composition of bond allocations going forward, investors should recognize the important role global credit can play. On the back of higher sovereign rates, credit yields have returned to levels investors have not enjoyed since the early 2000s. At the same time, the combination of fortified balance sheets and a resilient economy in many regions has expanded the universe of potentially attractive corporate issuance.
Furthermore, by viewing credit as a global opportunity set, investors can uncover unique market structures that lend themselves to offering the potential for strong risk-adjusted returns. Lastly, by allocating across jurisdictions, investors can select the securities that offer the most attractive relative value as well as capitalize on yield-enhancement opportunities presented by credits issued in different currencies.
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IMPORTANT INFORMATION
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.
Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.
Credit Spread is the difference in yield between securities with similar maturity but different credit quality. Widening spreads generally indicate deteriorating creditworthiness of corporate borrowers, and narrowing indicate improving.
Monetary Policy refers to the policies of a central bank, aimed at influencing the level of inflation and growth in an economy. It includes controlling interest rates and the supply of money.
Volatility measures risk using the dispersion of returns for a given investment.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
Marketing Communication.
8 minute read
Key takeaways:
- Investors often overlook the global nature of the corporate credit market, causing them to miss out on the possibility of enhancing returns per unit of risk.
- By expanding beyond their home market, investors can uncover compelling credit stories and unique market structures that can lead to more defensible business models and improved credit quality for issuers.
- Credits issued by the same company in a range of currencies can have vastly different return profiles, and astute investors can capitalize on this phenomenon while hedging away unwanted currency risk.