Secured Credit: strong relative performance but caution warranted



Colin Fleury, Head of Secured Credit, shares his thoughts on the risks and opportunities ahead for fixed income investors. Given the turning point in monetary policy, increased volatility is likely to continue into 2019, warranting a more cautious approach.

What are the key themes likely to shape markets in 2019?

We believe the increased volatility seen in the markets during 2018 is likely to continue. It may also be that investors should continue to expect bond portfolios to provide less of a hedge to equity portfolios in risk-off environments, as tighter monetary policy and quantitative easing withdrawal keep risk-free rates elevated. It is hard to call a turn in the credit cycle, but there are certainly some warning lights flashing amber. Overall, we believe a cautious approach and focus on long-term credit fundamentals, seeking to avoid the ‘value traps’, will be the best approach.

Last year, we emphasised the importance of China in setting the tone for global risk asset markets. This continues to be true as the country manages both its domestic growth trajectory and trade relationships with the US. We also flagged that, at some point, European markets may need to get to grips with the implications of a ‘hard Brexit’ and this has certainly come into greater focus, with some form of resolution required by early 2019.

Where do you see the most important opportunities and risks within your asset class?

Favouring sub-investment grade floating rate loans over high yield bonds, and asset-backed securities over investment grade corporate bonds, has been the correct call in 2018. This still feels to be the right positioning going into 2019 but further material relative cheapening of high yield and investment grade bonds may lead to some portfolio rebalancing. We also need to be mindful that the relative strength of the loan markets has led to more aggressive issuer and investor behaviour, making individual stock selection even more important.

Broad fixed income total returns by asset class – year to date

Source: Bloomberg, Credit Suisse and Bank of America Merrill Lynch index data, Janus Henderson Investors. Estimated US dollar hedged equivalent total returns, year to date to 31 October 2018.

Note: ABS: Asset-Backed Securities (floating rate index data used), HY: high yield corporate, IG: investment grade corporate, EM corp: emerging market corporate.
Past performance is not a guide to future performance

How have your experiences in 2018 shifted your approach or outlook for 2019?

We entered 2018 expecting an increase in volatility as markets adjusted to tighter monetary policy and the phased withdrawal of quantitative easing. In our view, this has been a key driver behind the increased volatility seen in 2018 and something that warrants continued caution as we enter 2019. While generally, we have been pleased with our individual stock selection this year, it has been noticeable how the price of securities can gap down significantly on the back of any weak performance numbers. This means we need to remain highly selective about where we invest and also back our convictions when we see short term price volatility.

Which themes have the potential to redirect markets in 2019? Download our Infographic to find out

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Please read the following important information regarding funds related to this article.

Janus Henderson Multi Asset Credit Fund

Specific risks

  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
  • The Fund may use derivatives towards the aim of achieving its investment objective. This can result in 'leverage', which can magnify an investment outcome and gains or losses to the Fund may be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • The Fund invests in high yield (non-investment grade) bonds and while these generally offer higher rates of interest than investment grade bonds, they are more speculative and more sensitive to adverse changes in market conditions.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • Callable debt securities (securities whose issuers have the right to pay off the security’s principal before the maturity date), such as ABS or MBS, can be impacted from prepayment or extension of maturity. The value of your investment may fall as a result.

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