Taking an active approach to credit investment
Rather than taking a set-and-forget approach to credit investing, this investment specialist sheds light on why it is time for active management in the asset class.
According to Grant Mundell, investment specialist at Equity Trustees Asset Management, credit remains a “standout exposure” for investors to consider in their portfolios.
Credit offers shelter by providing higher income when equity markets weaken, Mundell said. Moreover, recent credit upgrades by the major credit agencies of banks and finance firms have seen rising demand for such securities.
“With credit trading slightly above the median and representing good value, major bank sub debt offers value and spreads are expected to compress towards levels expected for A- bank credit.
“Corporate debt has attracted interest as earnings upgrades and rating upgrades for some names has led to increased investor demand.”
However, the investment specialist emphasised implementing an active management approach to credit, rather than passive, given continued economic and market changes.
Mundell explained: “Strong fundamental analysis and understanding of credit exposure is key, such as understanding and reviewing key documentation about a security and issuing entity or backers, drivers of profit, credit rating, balance sheet quality, outlook for the security.”
A strong understanding of securities comes from knowing what you are buying and where it sits in the credit stack, as well as the implications for credit rating changes.
In addition, Mundell encouraged investors to consider risk management strategies, such as duration management, sector exposure and credit quality analysis.
“Credit markets tend to be less efficient than equity markets, providing more opportunities for experienced active managers.”
Finally, he recommended credit investors to be nimble and opportunistic when pricing varies from fundamental value and to identify higher than expected income opportunities.
AUTHOR
Jasmine Siljic
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