The three key questions for all investors: Why this strategy? Why now? Why pick it over its peers?
With credit assets looking pricey, argues Alexandra Ralph, senior fund manager at Nedgroup Investments, now is the time for fixed income investors to recognise the importance of discretion over valour.
“The credit market is very expensive so we have positioned the portfolio for carry rather than spread compression,” she says in the above WealthWhys video. “That means we are very defensive – the duration of our credit bonds is very short and we are in more defensive sectors, such as telcos, utilities and senior financials.
Always go for bonds that have a lot of issuance outstanding and that are in a widely-held part of the market.”
“Essentially this market is more about avoiding stocks that go wrong rather than trying to pick out the ones that go right – purely because, at this stage of the cycle, credit is more subject to asymmetric risk and we just want to avoid those pitfalls.”
Ralph, who had earlier been discussing Nedgroup’s Global Strategic Bond strategy with delegates at The Wealth Forum North in mid-May, goes onto to highlight the importance of liquidity in the current environment – particularly with regard to the credit part of the portfolio.
Liquidity risk
“Credit is very much a liquidity-driven asset class,” she continues. “If you think about credit pricing as a combination of credit fundamentals plus liquidity risk, you can see that, at various stages of the cycle, liquidity risk could really spike as the market gets concerned about money coming out of the asset class.
“So we are very much focused on liquidity. Having been through the 2008 financial crisis, it was such an important factor in terms of performance – and therefore we make sure we are in very liquid bonds. Always go for bonds that have a lot of issuance outstanding and that are in a widely-held part of the market.”
WealthWhys – Alexandra Ralph, senior fund manager at Nedgroup Investments
A full transcript of this interview can be found after this box while you can view the whole video by clicking on the picture above. To jump to a specific question, just click on the relevant timecode:
00.00: Why global bonds now?
00.49: Credit markets look expensive – how do you position a portfolio in this environment?
01.28: What role does liquidity play in the fund and how do you manage it?
Why global bonds now?
Let’s start with performance and take, for example, the UK. Since the start of the year, UK government bonds have fallen 3% because, as you can imagine, the political backdrop has not helped that market – so investors should look to diversify across the globe.
We have seen high levels of debt in western markets and therefore politics plays a much bigger role – and therefore diversification is significantly more important in this day and age. And we are able to go anywhere in the western market, seek out that value, seek out those places that are not subjected to such political turmoil – and therefore we think we are able to provide better returns.
Credit markets look expensive – how do you position a portfolio in this environment?
Within the credit market, as you say, it is very expensive – so we have positioned the portfolio for carry rather than spread compression, which means we are very defensive. The duration of our credit bonds is very short and we are in more defensive sectors, such as telcos, utilities and senior financials.
Essentially this market is more about avoiding stocks that go wrong rather than trying to pick out the ones that go right – purely because, at this stage of the cycle, credit is more subject to asymmetric risk and we just want to avoid those pitfalls.
What role does liquidity play in the fund and how do you manage it?
For us, liquidity is incredibly important – especially within the credit part of the portfolio. That is very much a liquidity-driven asset class. If you think about credit pricing as a combination of credit fundamentals plus liquidity risk, you can see that, at various stages of the cycle, liquidity risk could really spike as the market gets concerned about money coming out of the asset class.
So we are very much focused on liquidity. Having been through the 2008 financial crisis, it was such an important factor in terms of performance – and therefore we make sure we are in very liquid bonds. Always go for bonds that have a lot of issuance outstanding and that are in a widely-held part of the market.
