JP’s Journal: Global credit and Oasis

The size of global fixed income is frightening, even larger than global equity markets. This poses significant challenges for asset managers that offer global strategies.

Some benchmark indices, covering both government and credit markets, have well over thirty thousand constituents. One way out is to mimic these benchmarks, using optimisation techniques. This still leaves the question of index composition. If we take an example of a broad fixed income index, the weighting to bonds issued in US dollars is about 46%, more than twice the size of the euro bloc. Debt in Japanese yen and Chinese renminbi each account for nearly 10% whilst sterling bonds comes in below 4%. So, the first challenge is to understand the nature of global aggregate benchmarks.

Markets in non-essentials are simple – if you don’t like the price, don’t buy. Talk of government investigations of ticket pricing takes us away from this basic concept. Oasis tickets are not a life essential.

Moving onto the credit component. The global credit market appears to offer a simple advantage over sterling credit strategies – namely a larger and more diverse set of issuers. From a performance perspective, however, the advantage is not obvious, with unhedged currency exposure the only way to have made significant gains (or losses) from investment in global credit versus sterling credit. Nevertheless, the direction of travel is clear – our clients want more global exposures. The key challenge is to offer added value and exploit credit market inefficiencies from a vast universe. This cannot be a straight replication of our sterling approach.

Our initial global credit focus was on high yield bonds - strategies that we have now been running for well over ten years. We introduced loans later, through the launch of a multi-asset credit fund and more recently gave clients access to emerging market credit. Our push into global investment grade credit has accelerated in the last few years. Our first strategies (European and Global) were built around our Sustainable process. We were fortunate in having a strong existing franchise, with a clear Sustainable philosophy that could be applied to the investment grade universe. In this way we are able to reduce the opportunity set to a manageable size through the use of both qualitative and quantitative metrics. Whilst recognising that Sustainable investment introduces clear sector biases our managers have been able to deliver well-diversified global credit products. More recently, we have looked at how a “climate aware” strategy could be applied to both government bonds and credit. There remains a challenge on how to offer an active approach with low tracking errors for those clients not looking for a specific Sustainable approach. Here we are working with our Data and Quant specialists to offer bespoke solutions that entail low active risk, based on analytical insights on security selection and optimisation techniques. It is a different approach to the research-intensive focus in sterling credit but is a pragmatic way in which to embed our DNA in such a massive universe.

Government bond yields drifted higher last week. Ten-year US Treasury yields closed at 3.9%, 8 basis points higher, whilst UK ten-year gilt yields rose by a similar amount to end above 4%. Despite renewed political tension in France there was little change in the yield premium on French government bonds, where the ten-year rate closed above 3%. In credit, we saw a pick-up in issuance in sterling after a lacklustre period although spreads were broadly unchanged. High yield markets were better for choice with spreads moving lower.

Markets and competition are wonderful things but can be disparaged when people don’t like the outcome. Listening to the business section on BBC Radio 4, which kicked off with a discussion on Oasis ticket pricing, the concept of prices moving to reflect changing demand and supply seemed bad. Markets in non-essentials are simple – if you don’t like the price, don’t buy. Talk of government investigations of ticket pricing takes us away from this basic concept. Oasis tickets are not a life essential.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.