Fund managers are increasingly optimistic about the long-term outlook for credit and see a wealth of opportunities in the asset class – as the baby-boomers hit retirement, the demand for income will be higher than ever. In the wake of the financial crisis and in a low interest rate, low yield environment, income has become harder to get from asset classes such as equities and government bonds.
Speaking at the Thames River and F&C Investments Annual Conference earlier this month, Thames River’s head of global credit Stephen Drew said credit was one of the few asset classes that will fill this income void. “If investors want high single- to double-digit returns but with relatively low risk, that points to credit,” he said.
In Drew’s opinion, credit will also do well from corporates returning to the capital markets rather than seeking financing from banks as well as the deleveraging of bank balance sheets, which has been accelerated recently by Basel III. He also highlights credit’s relative attractiveness in a low growth environment: “Credit doesn’t rely on buoyant growth and does well in a 0-3 per cent global growth environment.”
Ralph Gasser, senior product specialist fixed income at Swiss & Global Asset Management, agrees: “Unlike equities or commodities, credit investments are not a leveraged play on economic expansion. They do not necessarily need strong growth to deliver their full potential.”
Although the International Monetary Fund (IMF) currently forecasts world growth to be 4 per cent in 2010 and 4.2 per cent in 2011, activity will expand by just 2.7 and 2.2 per cent this year and next in the advanced economies.
Liontrust Asset Management’s head of fixed income Simon Thorp agrees that the “new normal” is a conducive environment for corporate bonds since deleveraging caps equities’ upside and investors need the certainty of an income-yielding asset. “Companies are in very good financial shape from a credit point of view. There’s little to worry about; default rates are very low.” Thorp says. Default rates are expected to fall over the next year from 4 per cent now to just 2 per cent, compared to default rates of close to 13 per cent only a year ago. Thorp believes the biggest set of opportunities lies in financials since the banking sector will have to recapitalise around $4 trillion, but he warns that the regulatory goalposts are permanently moving.
Good short opportunities remain difficult to unearth says Thorp, but he notes that any divergence from the path of fragile recovery could make life difficult for companies with weak margins and refinancing risk. Credit is asymmetric, it has a greater response to bad news, he explains.
The new normal will characterise the next decade and against this backdrop of low growth and low yields, credit will remain an asset class of choice for income-seeking investors of all sizes.
IN FOCUS | FIXED INCOME GLOBAL STERLING FUNDS
The above table shows the top and bottom 10 funds in the Fixed Income Global Sterling Based sector that have a track performance record of at least three years. These funds invest at least 90 per cent of their assets in the fixed income sector and have a majority held in investment grade bonds or equivalent. All of the top 10 funds are UK-domiciled. There are 33 funds in the sector, which have an average three-year performance of 37.3 per cent and an average fund size of £658.1m. All funds have managed to deliver positive returns over the past three years.