INVESTMENT ACTIONS

A deeper view of credit

Sep 21, 2017
By James Keenan, Timothy O'Hara

We believe the distinct attributes of credit, together with a greatly expanded opportunity set, provide the basis for a
strategic allocation.

Credit’s distinct attributes reflect its position in the middle ground between equities and traditional fixed income. It is less tied to economic growth and more exposed to idiosyncratic, borrower-specific risk.

Building a strategic allocation to credit has become more feasible because of a dramatic expansion of the investable universe. Ultra-low interest rates over the past decade have helped drive this expansion, but there are also longer-running structural and regulatory forces at work.

A diversified credit portfolio offers ongoing opportunities to seek alpha, in our view. This is done by adjusting allocations to the various types of credit, industry sectors and individual companies, recognizing that different types of credit outperform or underperform at different times.

An expanding universe

Growth in global credit markets

Chart: Growth in global credit markets

Sources: Standard and Poor’s LCD, JP Morgan, and Barclays, June 2017. IG and HY totals based on Barclays Global Corporate Agg Index and Barclays Global HY Index. Loan totals based on S&P/LSTA Leverage Loans Index and S&P European All Loans Index. Securitized total based on Barclays Global Securitized - CMBS Index, Barclays Global Securitized - ABS Index, and JP Morgan CLO issuance data . EM corporate total based on Barclays EM USD Aggregate Index.