At a recent Mercer Investment Forum in Sydney, a straw poll of the audience revealed that more than half would invest in opportunistic credit if given $1 million to invest in just one asset class. The vote followed a debate between four Mercer experts, who argued their corner on four different asset classes – private equity secondaries, opportunistic credit, insurance linked securities and gold. KRISTEN PAECH investigates the credit frenzy and the new role it’s playing in super fund portfolios.
The catalyst of the global economic meltdown has ironically become the beneficiary of a revived appetite for risk by super funds. While much of the cash built up over the last 18 months remains on the sidelines, those funds that have dipped a toe back in the water are eyeing the opportunistic credit markets, where spreads are arguably the widest they’ve been in 75 years.
In May, the $58 billion Future Fund revealed its debt securities exposure had jumped to 21.9 per cent in the first quarter, from 17.3 per cent the previous quarter, for the ex-Telstra section of the portfolio. New mandates were awarded to Goldman Sachs Asset Management and mid-market credit specialist Oak Hill Advisors. And the $450 million Spec(Q) almost doubled its investment in credit risk with US manager Loomis Sayles, despite the initial Loomis investment performing poorly during the subprime crisis.
However many funds, now more acutely aware of the premium that comes with liquidity, are re-evaluating the role of credit in the overall portfolio. Given the asset class is expected to generate equity-like returns over the medium term, and the risks are yet to fully play out, opportunistic credit is increasingly being viewed as an alternative to equities and hence part of the growth portion of the portfolio.
The $13 billion REST Superannuation allocated $300 million to credit in February as part of a new “growth alternatives” asset class, with the money split between Credit Suisse’s Syndicated Loan Fund (which provides exposure to high-yielding investments in the US) and Stone Tower’s Offshore Credit Fund. Sue Wang, senior fixed income researcher at Mercer, says traditionally fixed income has encompassed cash, government bonds and credit – both investment grade and to some extent sub-investment grade – but times are changing. “People generally classified that as the defensive part of the portfolio,” she says.
“Clearly this cycle has taught us that credit as a whole is not always defensive, so more and more, our clients are classifying credit, especially the high yield and sub-investment grade sectors, as being more ‘growthy’. That’s a clear shift we’re seeing in terms of the classification of credit as a sector as an outcome of this financial crisis.” Definitions of what constitutes “opportunistic credit” vary, and it’s important to note that Wang is referring to the opportunities that have arisen due to dislocations in the broader market, and not specifically high yield, senior bank loans, convertible bonds and emerging market debt.