either in the consumer sector, the corporate sector or the govern- ment sector. When one blows up, as the mortgage lending area did in 2007, it leads to the next “blow-up” occurring somewhere else. Looking at the numbers, the next crisis will emerge in corporate credit. That’s different than saying we are right on the cusp of it, but we know where the debt is building up.


Like a lot of the behaviour we are talking about, even though it’s rational, it’s indicative of the late cycle behaviour that has histori- cally produced bubbles. You should expect that at some point this happens in the corporate space as it is hard to see how it isn’t next in line. Halfon: There’s a debate on which of the bubbles is going to burst first. US equities have been massively overpriced. So are govern- ment bonds, and then there is the real estate market. What worries me is when you compare sectors, you realise that interest rate implied volatility is quite high. So people are expect- ing rates to go back up even though this is not happening in practice.


Implied volatility for equities is back down, not to the level of 2006 but closer to the levels of 2013 to 2015. This is extremely low when the markets are really high and a small shock could make a lot of damage at that level.


Equities seem to be in a worse shape for potential developmental bubbles than the direct private debt market, where demand remains strong. A lot of the lenders know this, and the spread being slightly reduced is not changing anything. The technology screening which SMEs undergo has improved tremendously. The platform, the discussion with auditors, with certified accountants, everybody is part of the same chain. So by the time you get to the lending stage, you know the SME inside out and have almost as much information than you would have on a big company. Shaw: People underestimate how much banks have withdrawn from this sector in the past 10 years. It doesn’t mean that the credit is bad, it’s just that banks have withdrawn from it and left a vacuum that private debt is now filling. Willsher: Where we are getting to now, especially as portfolios shift to something that looks more like 100% fixed income, is that trus- tees are having to choose illiquid assets. Where they are not keep- ing pace with the sophistication of their portfolio is understanding the risks. It’s difficult to tie down what risk is going to blow up, but trustees don’t have a proper holistic picture. They don’t under- stand when using multiple managers where they are doubling up exposures to individual entities. What are our country risks? What are we exposed to? Which organisations are we exposed? Most trustees cannot answer those questions.


PI: Where can value be found in the alternative side of credit? Shaw: At the smaller end of the market, on the illiquid side. Bonds for SMEs do not trade at a particularly attractive rate compared to investing privately.


March 2020 portfolio institutional roundtable: Fixed income 15


We have to accept that yields are low. If you want certain characteristics in your portfolio, you might have to pay for them. That’s the way the world is. Duncan Willsher, 20-20 Trustees


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