UK - Pension funds are being urged to call on in-depth credit analysis if they are concerned over falls in the value of their bond portfolios.
Fund managers believe only quality analysis can help investors avoid the companies which are likely to be downgraded by ratings agencies or even default on their bonds.
Fidelity Investments portfolio manager Alex Veys explained: “Traditionally, people would look to add value by buying improving credits. In fact, a far better way to add value is to avoid those names which are likely to be downgraded.
On a corporate bond, there may be two or three points upside, but 100 points of downside. It is more important to avoid the falling credits than to pick the ones who are going to be upgraded.
Veys added that holding a slightly higher weighting in the names that are going to be upgraded and not holding the ones that are going to be downgraded is the key way to add value.
Legal & General Investment Management associate director (bonds) David North added that value was only likely to be added through credit analysis on low investment grade and high yield bonds.
He said: “We certainly believe that we can add value through credit analysis and we employ quite a sizeable credit analysis team. But the worse the quality of the bonds, the more value decent credit analysis can add. There isn't much value at AAA level in independent credit analysis. At single-A and triple-B level and in the high yield world, certainly it adds significant value.
North also explained that credit analysis was more critical when investing in bonds than for equities, because in the bond market, the potential losses are much larger than the gains.
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