A visiting fixed interest manager has warned that the debate as to whether active fixed interest managers can add value — and whether they should be researched by asset consultants — is dangerous, especially in Australia.
Credit Suisse Asset Management’s New York-based director of fixed interest Charles Van Vleet says: “Passive management, particularly in Australia, makes no sense … Most of the discussion about passive management is about saving costs and fees … It’s not about making smart investments.”
He adds that while research in equities is about looking for growth opportunities, in credit it’s about avoiding losses.
“In equities, you can double your money, but in credit you can’t. Credit is skewed so that you can lose more than you make. If you are a passive manager, you lose the ability to avoid losses by not researching the market.”
Van Vleet says successful fixed interest investing requires diversity and if you don’t have this, one bad investment can wipe out all of your returns. Australia, however, has limited credit opportunities and a high concentration of industries and securities. “In a market like this, investors risk extreme concentration by going passive,” he says.
While emerging market debt has been the best performing asset class so far this year, Van Vleet believes that in the fixed interest environment, higher yield fixed interest will perform better than both emerging markets and government bonds. However, he is pro the offshore market for higher yield fixed interest because of the diversity.
According to Credit Suisse Asset Management investment manager Richard Quin, diversity is three-times more important for credit than it is in equity investments. “In equities, you can get away with holding 30 shares, but in credit you need to hold around 130 securities … And the lower down you go in credit, the more diversity you require.”
Van Vleet says the US market is 100-times the size of the Australian market and has 30-times more issues, which means that the average size of issues is larger and so the issues have more liquidity. The US also has 46 industry sectors, while Australia has 14.
He adds that 70 per cent of Australian debt will mature in the next four years, but only 30 per cent in the US. “This can make a big difference, as credit is a function of duration … the longer the duration, the more risk there is, the more possibilities for capital gains.”
