Copenhagen

Investec Asset Management are long-term believers that credit markets are inefficient due to a combination of behavioural and structural factors that present opportunities for nimble investors. Despite seeing many years of yield compression, Investec still believes there are good opportunities for investors across credit markets. In this session, the firm explores why an unconstrained approach to credit investing maximises an investor’s chance of capturing those opportunities, while also allowing a manager to take steps to protect capital in periods of increased volatility.

This session will consider the following discussion points:

The rapid development, growing maturity and diversity of emerging market corporate debt merit a standalone allocation;
The asset class provides investors with an attractive income, yielding 5.90%, and a relatively low duration profile of 4.6 years;
EM corporate bonds offer an attractive Sharpe ratio, and have proven to be a relatively stable investment in emerging markets;
The average rating of EM corporate debt is investment grade and the benchmark, the CEMBI Diversified Index, provides a diverse range of high-quality companies.

Since the last financial crisis ending 10 years ago, quantitative easing in the US and later Europe has sustained strong performance for all asset classes, including equities, government bonds, investment grade and high yield. Investors with liability requirements have had to place fixed income securities as the main part of their portfolios. During the first phase government bonds were the preferred investments. Yet the length of this liquidity injection meant that in the second phase where yields became too low, credit attracted the biggest volumes of portfolio rebalances, from investment grade to high yield, to unlisted and illiquids. Today, in Europe, it is common to see large investors, be it pension funds or insurance companies, hold as much credit as government bonds, if not more. Indeed, the end of quantitative easing sparks a shift of perspective. In particular, the prolonged low interest rate environment resulted in significant unrealised gains in the sovereign and credit portfolios. The first objective for investors in the now rising interest rate environment is the preservation of those unrealised gains. Secondly, rates increases and spread decompressions will be by nature disorganised. In that sense different pockets of the credit and sovereign portfolios will behave very differently in this new market environment. Thirdly, while volatility of sovereign bonds is either matched by volatility of liabilities, whether hedged or not, volatility of credit has become most often the biggest contributor to total portfolio volatility when considering exposure size. All of this means that investors will have a generalised need for bespoke credit hedges. Hedging interest rate risk is well established, but credit hedging remains largely insufficiently addressed, if at all. In this session, Lyxor Asset Management will discuss the solutions to this challenge.

This session looks at the rationale behind Wells Fargo Asset Management’s preference for European loans as its asset class of choice over the next 12 months compared to other credit sources, including US loans and European private debt. With yields remaining historically low and investors searching for a way to add return without undue risk or capital depreciation, there are five key reasons for this:

The senior secured status of the asset class provides strong creditor protection;
European loans provide investors with diversification benefits and a good hedge against higher interest rates;
European loans offer strong risk-adjusted returns;
The European loans market benefits from favourable supply and demand dynamics;
European loans offer an attractive alternative to an investment in US loans or European private debt.

Copenhagen - Thursday 25 October