Wilgar: The most interesting private investments are where fewest people are trying to sell product investing rather than investments. That is ultimately what’s driving the supply and demand dynamic these days.


Anything that sounds interesting or different or has a viability to it, isn’t an off-the-shelf, easily repeatable process. That’s where there is interest. Bank balance sheets is an interesting area. Allocations to trade receivables have lagged the rest of the market in terms of banks pulling back and people being able to source that risk. That is growing. At this point in the cycle, you need look in harder to find places to find the risk, but that doesn’t mean they are always good invest- ments. They are also more complex to understand and less predictable.


It is difficult for people to understand a lot of those risks, which can be a barrier to entry and affects the supply and demand dynamics. As an adviser or someone looking for new ideas, there is risk with you recommending it to them, so it can be tough in this environment to endorse those types of ideas. Cielinski: Value is not always in the harder to find places. Emerg- ing markets and asset-backed subordinated loans in the US look quite attractive and there’s been no real debt build up. Then increasingly, there is the ability to talk about solutions with clients. Can you write options to increase yield or are there other strategies that protect downside for a certain level of income? Port- folio construction may be more important than simply asset class allocation.


There are opportunities now in how you craft and construct port- folios that can offer good returns. It’s not just about stretching for the more illiquid and more alternative asset classes to get yield. Halfon: Using derivatives can sometimes lead to increased com- plexity. There is value there, but the choices you have to make can require a lot of analysis and must be well thought through. Wilgar: Ultimately, with fixed income being risk asymmetric it is not a place to take bets. There’s no way you should gamble on this being your alpha driver or being the next big thing, because the numbers will tell you that you can only lose 100% and some yield. Shaw: That’s not true. If the analysis is right, you are getting 600 to 900 basis points above libor. Wilgar: It is a balance. You need to have faith in something if you are a portfolio allocator because that fundamental risk asymmetry still overrides your thinking on what is a good idea. Shaw: I disagree. If you’re treating fixed income correctly, you’re treating it as an income-seeking asset by investing in parts of fixed income that could drive returns for an acceptable level of risk. Don’t treat it as a traditional gilt, which is how people looked at all fixed income years ago. Wilgar: I agree, but there’s a tipping point and I don’t know if many yields today reach that tipping point where you can earn enough


16 March 2020 portfolio institutional roundtable: Fixed income


Historically, the average level of default is around 1% to 2%. If the economic environment gets very bad, we will probably have other things to worry about, like hunting for food. Julien Halfon, BNP Paribas Asset Management


long term for the liquidity you give up to invest in some areas of fixed income. Halfon: Illiquidity is an interesting concept in private debt. The assets may be illiquid, but they are a lot more cash generating than people assume. SME loans can return 7%, 8% or even 12% in some cases, so you get a lot of cash out of the coupon payments as well as the capital amortisation. On an eight-year loan, you could get more than 50% of your capital back in four years. Pickford: The things I have seen with coupons that high have been leveraged. Halfon: This is on a purely unleveraged basis. Pickford: After fees, what coupons are investors receiving? Shaw: Double digits. Halfon: You get a spread of 10.5%. If you add leverage, and I wouldn’t recommend it, you could add 10%, 20%. Don’t go for a crazy leverage that you get in LDI that returns 3% or 4%, which can blow up at some point. If you get in early, you get a nice return for five years. Even if there is a default at that point you have received more than your money back. Shaw: The loss severities are not extreme. When you do get losses,


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