Interview – Barry Kenneth


corporate bonds, it has long-lease property, ground rents, structured notes and loans. We have enhanced that portfo- lio over the past year. If you look at global high-yield corporate bonds, we have a BBB, BBB+ average rate whereas the average rate in our credit portfolio is closer to A-. We added ele- ments of protection last year as markets went higher and that stood us in good stead for this pandemic, but I would not profess that we foresaw what was coming.


Because our funding levels are relatively high, we came into this from a position of strength, so we thought it was sensible to de-risk as markets became fundamentally expensive.


With market values falling, is this a good time to get back into the market? There are buying opportunities around and we have allocated capital to those. From a personal perspective, I see more value in credit than in equities as credit spreads widened when equity markets fell.


If you look at how governments and cen- tral banks have targeted their stimulus measures, they have initially focused on trying to control the yield curve. The other element is to protect the cashflow and bal- ance sheets of corporates through buying debt. I can see why that would underwrite credit; you now have a buyer at any price. I am not quite sure how that filters into the equity market. If you look at the S&P500, for example, we are getting close to 3,000. Whereas we have corporate spreads in the US trading at around 300 and you effectively have an infinite buyer in the government and the central bank. That seems to be a much better reward than equities. So by the end of March we deployed more money into credit, but we have not deployed more incremental money into equities.


That decision seems to be purely driven by central bank action rather than a change


18 | portfolio institutional May 2020 | issue 93 Before


I don’t buy it that private assets necessarily protect you more from volatility.”


in the fundamentals of the underlying assets. No.


the central bank action,


spreads had moved to extreme levels because cash was king. If you go back to 2008, we saw a repeat of that situation where retail and institutional investors were selling at almost any price. If you looked at that time, robust companies with strong balance sheets and access to liquidity, there is no differentiation in the first leg down between sectors and indus- tries and companies, so we deployed some money into high-grade credit at that point. We were getting high-yield spreads for investment-grade companies with strong balance sheets. We were selective as to where money was placed. It was not into high yield or the lower part of the capital structure, it was more the higher end where we had plenty of protection.


So these assets were investment grade but trading at high-yield spreads?


It is difficult to deploy capital when you have a market in freefall. From a risk-re- ward perspective, we chose not to rebal- ance into equities as the market fell but more into credit. That has worked okay thus far. There are an awful lot of chal- lenges that you can only clear when we


come out of this. As much as the market reacted to the stimulus from central banks, there will be real challenges for companies going forward. I am comforta- ble being more in credit as we come out of this, but we could, of course, change that as we move forward.


Unlike in 2008, this crisis is rooted in the real economy. What happens if concerns about liquidity in the credit markets trans- lates into solvency risks?


If I was concerned about bankruptcies, I would rather be in credit than in equities. Where we manage money internally, we manage it at the higher end of the capital structure and the stimulus put forward by the government will protect those compa- nies. They might have additional leverage as they move out of this but as long as they have their cashflows in order and we chose industries that we expect to have good demand going forward, then it should be okay.


Equities could go either way. If we come out of this lockdown and the demand side picks up quickly and we end up in a tur- bo-charged economy, given the extraordi- nary levels of stimulus we have seen, we would want to be more invested in equities. We are, of course, invested in equities and


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