Sweating your assets

25 Jul 2016

Other fixed income investments have divided fund managers such as emerging market debt and contingent convertibles (cocos). For the former, flexibility is key, according to Andy Tunningley, head of UK strategic clients at Blackrock.

“There is a trade-off between local debt and hard currency, but what we saw last year is that you have to be fleet of foot and have a dynamic approach that can take advantage of
market conditions,” he says. “For example, this year we have rotated into local currency and are picking up double digit returns by being in the right countries.”

As for cocos, these hybrid securities which are designed to bolster the capital of banks were all the rage until this year when concerns started to mount that the rules for these bonds were too complicated and could undermine a bank’s financial position rather than strengthen it in a crisis.

As Amey says: “Cocos are for investors seeking high returns but who can tolerate volatility. Yields can be around 7-8%, but it is important to maintain exposure to solid institutions, particularly large US and UK banks.”

BIG MONEY

Institutions lacking resources or the inclination to pursue individual or riskier strategies can use multi-asset credit funds combining many of these strategies under one umbrella.

They have the ability to generate alpha, diversify assets and mitigate risks. This is why globally these funds have doubled in size over the past three years from £48bn in 2012 to stand at £96bn as of June 30 2015, according to recent figures from Punter Southall.

The risks have also been highlighted. For example, in a credit-stressed environment, high yield, bank loans and ABS may suffer from poor liquidity plus the defensive tilts and short positions that are taken may only offer partial protection in a sell-off. However, over the long term, fund managers believe these funds should help cushion the blow and produce better risk-adjusted returns.

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