Investment Desk Bulletin

23 June 2017

Fixed Income: Identifying value, Apportioning risk, Disseminating performance

IDB 13 06 17

By Rabbani Wahhab

In this week’s IDB we look at fixed income, focusing on areas of value we find attractive, how our investment process allocates risk to favoured asset classes and lastly how our strategies have performed versus market benchmarks and the peer group.

Although the pace of Central Bank balance sheet expansion has started to slow, the backdrop of steady global economic growth and low real rates provide a supportive environment for our preferred areas of value in fixed income.

Corporate Credit looks in good health, with cash balances growing and as a result, net debt and leverage have fallen. High yield refinancing risk in the near term appears contained, because borrowers in recent years have been able to issue 6-8 year debt. The default outlook should be benign given higher corporate profits.

Financials remain our highest conviction and this view is reinforced by the ongoing strength of bank balance sheets in both Europe and the US. Valuations remain attractive on both an absolute and relative basis.

Improving economic conditions and lower vulnerability to commodity prices have helped drive recent flows into Emerging Markets (EM). Our approach to EM remains highly selective, taking advantage of attractive valuations, particularly in China and India.

The sizing of allocations to preferred sectors is a function of spreads, with relatively wide sector spreads attracting higher allocations. Portfolio construction will then drill down into a number of securities, favoured credits and appropriate duration. 

The London & Capital fixed income funds are managed on a total return basis and are not constrained by benchmarks. Performance over the medium and long-term has been favourable versus both broad market benchmarks and the peer group.