Spreads are widening in sectors that are often considered relatively low risk, but you need to be cautious in this environment. Anand Kwatra, Phoenix Group
going on will be more far reaching than just the short-term credit which has been impacted in the past few weeks. A lot of the investment cases for issuers have been particularly challenged and have sometimes changed. Whereas you might have been comfortable with an A-rated credit a year ago, potential- ly that is not what you want to hold for five to 10 years at the moment.
On the other side of it is new issuance and the maturities coming up in the next couple of years within IG, which is a bellwether for the new issuance markets. We are seeing a lot of new issuance coming, particularly US investment grade. A lot of that is on the back of maturities coming up in the next year to two and compa- nies hoarding cash to try and weather this storm. So for investors that can implement a CDI strategy at the moment, there are some real opportunities. You can pick up some high-rat- ed credits with much wider spreads than they had a year or two ago. At the same time, you need to be cautious. Take selective meas- ures, not particularly on a sector basis but on an issue-by-issue ba- sis. There are sectors that are troubled and directly impacted by what’s going on but they could still have good individual issuers that you would be happy to hold. So it’s down to thorough bottom up due diligence for managers.
PI: Anand mentioned credit risk. How easy is it to look at an asset and assess its credit worthiness at the moment? Fullerton: It’s too early to say. One of the things we are looking at on the fixed income desk is a true assessment of illiquidity. It is difficult at this point to come up with any sensible conclusion be- cause things are changing daily. But, so far, the riskiest areas of the
market – high yield and bank loans – have been among the hard- est hit. Coming out of this crisis, they may also present the best opportunities.
PI: How are you approaching new issuances these days, Claire? Bews: Fundamental research is crucial right now. I am fortunate to have a huge team of analysts to do that for me. We are taking it on a case-by-case basis and looking for assets with robust balance sheets. We may purchase bonds in the knowledge that there is a strong likelihood of a downgrade from A to BBB. If that is priced in and we are happy with the underlying credit fundamentals we will se- lectively buy those assets.
There are a lot of opportunities in the new issue market that are coming at attractive levels, particularly in the US. These are com- panies that are seeing an opportunity to bolster their balance sheet to whether the storm.
PI: Anand, is this how you approach fixed income assets? Kwatra: As we have heard, there is an element of pausing. There is also an element of going back to the fundamentals. In a CDI strat- egy you need to think over the long term and want investments which are going to deliver the cash-flows when you need them. For example, this leads us to consider government-supported sectors, such as local authorities and social housing within the strategy. We are placing a lot more scrutiny on the more cyclical invest- ments, and that’s where we are looking at the liquid portfolio to see if any rebalancing is needed.
A comment was made earlier about the spread widening compen- sating for downgrade risk. That is something we are thinking
April 2020 portfolio institutional roundtable: CDI 9
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