Post Brexit portfolio positioning - credit strategies


Jonathan Platt, Head of Fixed Income

30 June 2016

Markets

The result of the referendum was contrary to our expectations, and to those of the broader market. Markets have experienced great volatility, with an initial drop in equity market values and a decline in UK government bond yields, as investors abandoned the former for the safety of the latter. Uncertainty is the prevailing sentiment; this has been reflected in investment-grade corporate bond prices, which have underperformed their government counterparts. Sub-investment grade corporate bonds have also been affected, on account of their higher sensitivity to market movements.  Nevertheless, we have seen no evidence of indiscriminate selling across fixed-income markets and although credit liquidity has been thin, there are no signs of distressed or forced selling. 

Financials sectors have experienced the most significant spread increases, which is typical of areas that are traditionally more acutely responsive to market movements.

Supranationals and agency debt have held up better amid market unsteadiness. Structured and secured debt should prove to be attractive as investors favour more stable sources of income in a ‘risk off’ environment.

In big picture terms, a division between financial and non-financial positions is clear. Spreads across all sectors have widened, but the movements over the past few days have not been as extreme as those experienced at the beginning of 2016.

Activity and positioning

We have not altered our core positioning, and we retain our focus on bonds with solid income streams, supported by strong assets. While we do not take liquidity for granted, our portfolio structures are not dependent upon high levels of market liquidity. We have the flexibility to be opportunistic in terms of taking advantage of price movements, but we are highly selective in the bonds that we purchase for the portfolio; volume has been fairly subdued following the referendum result.

Risk is built into markets, and is being reflected in government bond yields, which are at record low levels as investors are now paying a substantial premium for these assets. The yield on 10-year UK government bonds dipped below 1% following the vote, and the yield on benchmark 10-year German Bunds has fallen into negative territory.

RLAM’s credit funds

Our credit strategies are designed with teh aim of delivering attractive income and returns over the medium term, and are structured so as to provide a balance between risk and return. While some of the positions will have been affected by recent movements, the diversification of our strategies in terms of sector, currency and geographical exposure will have offset some of the negative impact. Further downside protection provided by the bias towards bonds which are supported by structural enhancements and robust income streams also provides support in times of market turbulence. Low yields have been a feature of the investment landscape since the financial crisis, and as they continue to characterise the global economy, we believe that our focus on income generation and stability will remain attractive. 

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.