fundamentals of defensive credit, it’s low costs but not benchmark constrained. Pickering: I hope this debate doesn’t stand or fall on whether there is or is not an illiquidity premium. An illiquidity premium is something that marketing departments like because it fits into an advertisement space.


It is no longer simply bonds or equities, there are several ways of tapping into the wealth that society creates. We can help with that wealth creation rather than just tap into it. For me as a trustee, there are many dimensions that determine what is the most important strategy and what is the most important component within that strategy. It’s not if there is an illiquidity premium or not, it is do these assets provide me with the returns I need over the timescale with which I am unconcerned. If I’m thinking of buying out in five years, I don’t want an investment where the cost of going in, staying in and coming out is so great that five years is inappropriate.


they are not enormous. You are not writing off the whole loan. We have not written off more than 15% so far. So if you are getting a low double digit return, it’s very income generating asset. Willsher: 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. Wilgar: The common theme you can take from the private side and across the fixed income markets, perhaps across markets more broadly, is the idea of being less compensated for incremental risk. That applies in its extreme when you go to the traditional buy and maintain CDI portfolios where we don’t know if we are necessarily getting paid enough for the corporate credit risk we are taking. When you add management fees on top of that, it’s an interesting conversation. It is well publicised that a lot of the alternative credit strategies are more strategic and are doing things investors do not expect, maybe they are illiquid and have high complexity. A lot of that pressure and strain comes from the need to meet your own fees, to be able to pay for yourself. It’s a better option than passive credit, which is a bad idea. It’s also less tied to benchmarks. There is not an intelligent reason behind why credit benchmarks are the way they are. If you go back to the


PI: What trends are you expecting to see in fixed income over the next 12 months? Halfon: Reflation in alternative asset classes. There will be fewer fixed rates than floating to potentially benefit from the spreads there. Secondly, it is going to be difficult to extract value from structured products that have an equity tranche. That’s going to be more on the traditional levels and less on the riskier parts. There’s a need to go even further in the governance. There are more ways to choose and there’s more sophistication and com- plexity. Decisions will have to be taken with the commitment and understanding of the investors, more so than in the past. Value could be found in a number of places, but people will not blindly follow us. We have to go even further in that direction. That will create new challenges. Cielinski: It’s too easy to spend when inflation and rates are low, so I expect we will keep electing people who carry us down that path. In the 2020 US election, I wouldn’t be surprised to see fears of a fiscal push in the years ahead that will result in pushing yields higher eventually.


Low rates are here to stay. Even if they go up it shouldn’t be dra- matic. The credit cycle does not have immediate threats, but equally, valuations are now detached enough from the fundamen- tals that I expect little in the way of outperformance. Wilgar: There is strong investor capitulation on the idea that inter- est rates are going to go up. More people are prepared to take interest rate risk for low compensation even when they are not forced to by liabilities.


In terms of research, consumer risk as opposed to corporate risk in credit is interesting, irrespective of what goes on with markets. That is an area that will continue to see more strategies entering portfolios.


March 2020 portfolio institutional roundtable: Fixed income 17


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