28 (ALTERNATIVE) FIXED INCOME S
Pockets of opportunities for investment grade credit The investment grade credit environment has become more challenging as spreads and yields have moved back towards historic lows. However, it is still possible to find pockets of opportunities, provided an investor is alert and disciplined. By Joost van Mierlo
Tim Winstone, Manager of the European Investment Grade Credit Strategy for Janus Henderson, states that central banks’ quantitative easing intentions are admirable, but that sometimes their asset purchase programmes are directly competing with investors, which can make life difficult for asset managers. But Winstone isn’t complaining. He is absolutely certain that the speedy response to the COVID-19 crisis was crucial and the reason that most markets and sectors have almost returned to normal. You must have an impossible job, with spreads and volatility at historic lows? ‘It is true that volatility has been relatively low this year, and spreads have tightened considerably. As active managers, our mandate is to outperform the benchmark. That might be easier in periods of high NUMMER 7 | 2021
volatility, as volatility is often synonymous with opportunity. But it also means we might get it wrong. We are not necessarily chasing the highest excess returns. What we are looking for is attractive risk-adjusted returns. Within fixed income we need to pay careful attention to downside risks. Our aim for clients may be to outperform the benchmark by a specified amount, but we treat this as being averaged out over a few years, so that we take risk at times that we believe are appropriate.’ Aren’t you choosing the lower end of investment grade credits at this moment, in order to chase return? ‘That’s not the way we think. A high ‘A’-rated bond might be more attractive than a low ‘BBB’-rated bond trading with a wider spread in basis points from a bottom-up fundamentals perspective. We will also take a judgment on the macroenvironment and the overall portfolio. Within the corporate credit team, we typically classify bonds into three categories: a high quality bucket with high quality BBB, A and AA bonds; a core stable income area with low BBB to mid BB-rated bonds; and high return potential bonds, often with lower credit ratings. For our Euro investment grade portfolios we would generally invest in bonds that would bucket into the first two categories. The adjustment of our portfolio across these two categories is based on our assessment of the credit cycle. In the late cycle, where company profits are under pressure and cash flows are peaking or deteriorating, our portfolios would be constructed to hold more of the high quality bonds. In the early cycle, where companies are repairing their balance sheets and cash flows are on a sharply improving trend, we will generally invest more in the high return potential bonds. This establishes an overall framework of where we would like to invest, before engaging in fundamental bottomup credit research to identify the individual securities to include in the portfolio.’ So what is the current assessment? ‘We are ‘constructive’ on the economy, which means it is generally positive. We
