Institutional investors will need to adopt more active management in their investment strategies and move away from long only credit toward industry- and -company-level analysis in order to secure adequate credit market returns.
QIC director of fixed income research & strategy Katrina King said that while institutional investors had benefitted from strong capital returns from credit markets, this was likely to change and portfolios which “rode the spread tightening of the past few years will be threatened”.
King stated that despite corporate bond yields being at their lowest since the global financial crisis, economic growth was likely to pick up and central banks would normalise monetary policy, which would place pressure on yields to rise.
At the same time, inflation pressures should not be discounted, according to King, with credit spreads tending to rise during times of inflation uncertainty.
“Investors have just lived through a lengthy period of ultra-low official interest rates which, while not our base case, carries the risk of causing an inflation outbreak,” King said.
King said global economic conditions are improving, leading to shareholders expecting higher returns as well as placing more pressure on management to take less risk-averse positions.
As a result of these changes, institutional investors need to take an active investment approach and remove interest rate and inflation risk from their credit allocations to benefit from corporate bonds’ yield advantage, according to King.
He said long-only credit strategies were less likely to perform, and deeper company and industry analysis was required to find companies with reassuring credit metrics.
King stated that current market conditions required an investment process that was decoupled from the benchmark and managed inflation, interest rate and credit risk separately, and that also took macro positions and long short trades between different indices to make the most of corporate bonds’ yield advantage.
