Managers need to think outside the credit box
Tighter spreads on credit due to demand for income producing assets at nil interest rates will mean fixed income managers will have to widen their investment horizon.
Senior investment analyst at Zenith Investment Partners Steven Tang said active managers have previously thrived by being overweight to corporate debt, or credit, in their portfolios.
Manager portfolios made money as prices rose on these investments.
“Whereas this environment has favoured managers with a credit orientation, spreads have tightened to such a degree now that the future may favour those with a more diverse skillset,” Tang said.
Nevertheless, managers are still overweight to credit, believing it still has value despite the risks it carries.
They sought to alleviate the risk through using credit derivatives but Tang warns this is not the cure-all in the case of large scale credit event or fund redemptions.
Fixed income remains a staple of medium and long-term portfolio structure, with the UBS Composite Index (all maturities) returning 4.14 per cent over the 12 months to 31 May 2014.
“However, it is very important that investors understand the risks that are embedded in manager portfolios and seek managers that have ability to add value in different market environments,” Tang said.
AUTHOR
Malavika Santhebennur
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