We have been living for the past few years under an unprecedented regime of unconventional monetary policies. Abundant liquidity poured into developed economies has had a number of consequences on financial markets: very low and sometimes negative interest rates, inflation of asset prices under the pressure of investors starving for returns. The hunt for yield has pushed Bond prices upwards, probably translated into much more concentrated portfolios in some market segments, possibly leading to misallocation here and there.
What followed was a persistent decline in volatility and higher correlations across asset classes. By itself, this market regime is not enough to call for a turnaround anytime soon. However, we can argue that a long period of time with low volatility and high correlations could amplify market drawdowns.
Of course, nobody likes drawdowns. This is especially true when it comes to Fixed Income markets where there is no “risk-free” asset anymore and where a few basis points hike in rates could cancel out a full year of income.
Now that ultra-accommodative monetary policies have probably been having their days, especially amidst the current resynchronized economic cycle, market begs the questions:
- How would higher rates impact Bond valuations?
- How to adapt portfolios in order to cope with a potentially unfriendly environment?
In this context, we believe that Credit Continuum is an immediately applicable solution to address the next cycle. The Credit Continuum solution enables investors to make the most of the whole Credit spectrum including: Investment Grade, High Yield Bond investment and Private Debt. In addition, the Credit approach illustrates how we can adapt our portfolios to the current stage of the market cycle.
Wide Investment Universe
This is less about diversification - a commodity that tends to become scarce when volatility increasesthan about allocating across a wider spectrum of market segments. The inclusion of Private Debt securities allows adding names that are not available in the Listed Bond market. Finally, this multisegment allocation strategy offers higher flexibility and reduces concentration.
In the current low volatility regime, several market segments behave in similar ways. For instance, from a risk-return perspective, nothing looks more like a Corporate Bond than another Corporate Bond irrespective of its geography or sector. Consequently, there is little to expect from a traditional bottomup approach. Conversely, there is much more to expect from the investors’ ability to reallocate across segments, geographies… This implies to be able to acknowledge the market regime and to adapt the investment process towards a top-down approach that translates macro-economic scenarios, fundamentals, technicals and valuations into strategic and tactical allocations. Favoring flexibility at the expense of traditional investment style helps to adapt to these different phases. The Credit Continuum solution, while being a Buy & Watch solution, offers a high flexibility in terms of calibration of the key investment parameters and set of market segments.
Head of Alpha Fixed Income