Credit investing – bias beware as the cycle turns

A sound portfolio construction process is critical to avoiding the pitfalls of behavioural biases, which will become all too apparent as the credit cycle turns, argues Josh Lohmeier, Aviva Investors’ Head of North American Investment Grade.

Has the decades-long bull market in bonds made some credit managers look better than they really are? In the favourable market environment of the past 30 years, many managers found success simply by taking on additional risk and not necessarily adding much value.

When evaluating credit managers, it is necessary to measure how their strategies are likely to perform over the course of a full credit market cycle. If a manager maintains a long credit risk position at all times, through periods of both tightening and widening credit spreads, its ability to add alpha is questionable. The true test of a credit portfolio strategy comes when the trend shifts - an increasing possibility as interest rates rise from historically low levels and credit spreads begin to show much higher levels of spread volatility.

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