Credit investments can provide a solid income stream for investors, but largely remain ignored due to traditional portfolio construction methods, according to a specialist manager covering the sector.
Credit investments fell into the intermediate risk category and often were not considered due to the “barbelling” of portfolios, which saw investors making allocations to assets at the ends of the risk spectrum – equities at the high risk end and cash and bonds at the low risk end – with nothing in between, Bentham Asset Management managing director Richard Quin said.
“For retail investors and the increasing pool of SMSFs (self-managed superannuation funds), credit is an intermediate investment class that plays a very positive role in portfolio diversification. With investors shying away from the volatility of equity markets, credit provides a predictable and regular income stream with minimal capital volatility,” Quin said.
“It’s a less aggressive way of achieving returns, so you get some credit protection, but it also gives you this income on an ongoing basis.”
The type of instruments in the credit investment universe include United States high-yield bonds, syndicated loans, US investment-grade corporate bonds and Australian inflation-linked bonds.
Investing in intermediate risk assets, such as credit, is a more compelling proposition given the process of relying on diversification through negatively-correlated asset allocation may be flawed in the current economic environment.
“If that correlation [relationship] fails, you’ll have a little bit of a problem,” Quin said.
“If you see interest rates sell off and growth disappoint, both of those asset classes are going to have an unpleasant environment. It’s not really something people really want to consider, but it is actually a likely thing.”
