'European banking, industrial and real estate bonds, here are the issuers to focus on'
"Spreads are approaching historic lows and we are positioned defensively. However, there are still pockets of value in these sectors."
3' min read
Key points
3' min read
In the bond market that still have potential value are European banks with higher creditworthiness, industrial sector bonds and some real estate issuers. This is explained in detail by Richard Ryan, manager of M&G Investments.
What are the benefits of a multi-asset credit strategy in terms of return?
The strategy aims to achieve a long-term outperformance of between 3% and 5% per annum over cash and before fees. In a market environment with such high prices, as is the case at present, the strategy might achieve returns slightly lower than its long-term objective, but the rotation towards liquid defensive assets (e.g. cash, Treasury Bills, money market funds) will allow us to re-enter the market when the opportunity arises. As markets eventually rally, we try to build risk in falling markets where the price and risk of securities are misaligned. Typically, the strategy is less risky when spreads are tight and vice versa. In periods of high instability, preserving capital becomes crucial and it is crucial to take advantage of episodes of market volatility while keeping a close eye on risk.
Is there any strand on which you are particularly focused?
Pure stock selection with a bottom-up, value-driven, research-based approach. We seek to seize opportunities globally, but with a strong focus on the European market by investing in various bond asset classes, from the highest creditworthiness securities to high yield securities, hedging interest rate and currency risks. The strategy invests only when and where there is a strong conviction.
What are the criteria for selecting titles?
.Our investment approach is based on the belief that the market may misprice (i.e. over- or undervalue) securities and assets. Such inefficiencies can affect a bond, an issuer or an entire sector, but usually the best opportunities arise from behavioural episodes driven by fear, panic or other factors. We seek out the most attractive opportunities through careful selection of individual securities and analysis of fundamentals. We only invest when we are firmly convinced that the price offers an appropriate level of compensation for the risk.
Where can you find value today in the bond segment?
Yields remain high following the rate hike cycle, so we are convinced that investors should continue to consider an investment in fixed income. From a spread perspective, we are approaching historical lows in credit markets and are therefore positioned defensively. However, pockets of value still remain, particularly in the sector of European banks with higher creditworthiness, in industrial stocks and in some real estate issuers.
