Sweating your assets

25 Jul 2016

However, Pimco managing director and portfolio manager Mike Amey believes investors could still reap returns of 1% to 1.5% by focusing on strong credits that are more than capable of performing in a challenging or moderate growth environment. Illiquid credit strategies are also high on the list and over the past year institutions have been busy filling the gap left by cash strapped and regulatory laden banks.

Recent figures from Willis Towers Watson show that typically pension funds have globally allocated more than $7bn to these investments, which range from direct lending to real estate and infrastructure debt, over the past five years.

“These are opportunities for investors who have the capacity to lock up liquidity,” says Riley. “It makes particular sense for pension funds and sovereign wealth funds that have long-term liabilities and limited near-term cash outflows. However, they also have to understand that in order to extract the illiquidity premium, there is an opportunity cost that
rises during periods of market stress.”

MORE POWER TO YOUR ELBOW

European leveraged loans have been popular as largely unaffected by global volatility at the end of 2015 and in the first few weeks of 2016, in stark contrast to US leveraged credit and European high yield bond markets.

“The loans had a difficult credit crisis but they were one of the best performing asset classes last year,” says Annabel Gillard, director within fixed income at M&G Investments. “There has been a lack of forced sellers and they have proven to be very defensive. We also believe that now is a good entry point for ABS and there is outstanding value after the sell-off in the beginning of the year.”

Direct lending to mid-sized corporates has also gained momentum, although due diligence is required. “These strategies offer greater returns and although you forego liquidity it does not always mean you take on additional risk,” according to Gillard, who says these require closer monitoring and more secure contracts. She adds: “We do our own indepth credit research and lend to mid-sized companies where cashflows are stable and predictable.”

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