Advisers and investors need to get their hands dirty and rethink their current strategies or risk seeing the capital values of their portfolios eroded, according to an expert.
Katrina King, director of fixed income research and strategy at QIC, spoke to Wealth Professional following the release of QIC’s red paper Au revoir credit beta: meet credit alpha.
She said there’s evidence that the economic environment is already starting to change, and advisers can no longer afford to sit cushy with the long-only credit strategies that they have enjoyed for the past five years.
“We’re getting to a point now where we believe credit is more fairly valued,” King said. “The days of making money from being long are probably gone. You’re really going to have to start dusting off the old credit techniques.”
Advisers should be looking for credit managers who have the ability to do micro-credit analysis and pick single name credit winners to go short with, she said.
The main driver to this change is that Australia is falling to average levels in the amount of credit spread. QIC track the correlation between different credits and their movements, and it’s starting to drop off.
It’s vital for advisers and investors to pay attention to this change now because not only will the returns of late no longer be available, but they may also start to suffer portfolio erosion.
“I think [the market] is taking us back to where we were pre GFC – it’s a natural part of the economic cycle,” said King. “We’ve probably had it a little bit easy in the past five years in not having to do much micro-analysis.”
One of the first things we’ll start to see happening is a shift from favouring debt holders, to favouring equity holders.
We’ve reached a point in the recovery where corporates will be under more pressure from their equity holders to boost equity returns, she said.
“The equity holders’ demands will start to ring in their ears a bit more. To some extent it may have already started. I’ve seen more and more notices of mergers and buy outs,” King said. “I don’t think it will be systematic or a huge wave of buyouts, but it will certainly be idiosyncratic. I’m not saying go short credit as an overall rule, but I’m saying ‘get your hands dirty’."
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