Researcher urges caution on credit risk
Researcher InvestorWeb has warned advisers to be aware of the risks associated with high yield credit investing compared with traditional fixed interest assets, as credit spreads have reached low levels.
The warning came as part of an InvestorWeb evaluation of the diversified global credit fixed interest sector, which found credit spreads were now at low levels, exposing investors to the risks associated with high yield credit investing.
With credit spreads being so low, the researcher said returns might not be sufficient enough to compensate risk.
It added that managers had recently needed to decrease the credit quality of their portfolios into higher risk credits in order to maintain yields.
Describing this period as a credit “free lunch”, the researcher warned that the opportunity to do this could be coming to an end, resulting in casualties within the credit fund sector.
InvestorWeb did, however, predict the credit cycle would normalise over the next few years, viewing the current low level of credit risk premiums as being unsustainable.
Overall, the researcher claimed that as long as investors were aware of the risks associated with investing in credit funds, they should be able to enhance the returns of well-diversified portfolios.
As part of the review of the sector, InvestorWeb rated the Credit Suisse Hybrid Income Fund as a “strong buy”.
In the researcher’s opinion, the Credit Suisse fund’s lowly correlated asset mix should enable it to endure adverse credit events better than other funds.
Nonetheless, InvestorWeb said it was impressed by the quality of all of the funds in the review.
It rated an additional five funds as “buys”, with each risk category (low, medium and high) being equally represented.
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