Normal
0
false
false
false
MicrosoftInternetExplorer4
/* Style Definitions */
table.MsoNormalTable
{mso-style-name:”Table Normal”;
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-parent:””;
mso-padding-alt:0cm 5.4pt 0cm 5.4pt;
mso-para-margin:0cm;
mso-para-margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:10.0pt;
font-family:”Times New Roman”;
mso-ansi-language:#0400;
mso-fareast-language:#0400;
mso-bidi-language:#0400;}
Financial markets are pricing in corporate credit default rates
more than three times higher than during the Great Depression, meaning super
funds that invest in a highly diversified portfolio of investment grade credit
are likely to be compensated for the risks that they are taking regardless of
whether spreads still blow out, new research has found. Research from Melbourne-based Omega Global
Investors titled High Investment Grade Credit Opportunities for
Institutional Investors revealed implied default rates for US corporate
bonds at March 31 this year were 38 per cent for corporates and 53 per cent for
financials.
The worst default rate
since 1920 for corporates was 9.2 per cent, according to the research. “If 9 per cent of corporates defaulted in
1931, imagine what the world would have to look like if 38 per cent of
companies defaulted,” said Mathew McCrum, director of investments at Omega Global
Investors. “We think the risks are
overdone compared to what the market is implying.” George Vassos, managing director of Omega,
said the implied default rate of non financials, which according to the
research is 26 per cent, had overshot.
“The
nervousness on financials globally is dragging up default rates across the
board,” he said. “If you were to lock
down where that opportunity sits, it’s in the non financial sector.” The research showed that if corporate credit
spreads blow out to 8 per cent, the return from this increase will be -3.96 per
cent, but if spreads drop to 4 per cent, the return from the reduction will be
7.42 per cent.
McCrum said that the
caveat is that the portfolio must be highly diversified. Omega believes that
market cap benchmarks are inefficiently constructed and do not provide
sufficient diversification. Those
companies that issue the largest amount of debt claim the highest weightings in
the benchmark, yet they are not necessarily the most financially healthy
organisations, McCrum added.
“General
Electric is 4 per cent of the global credit benchmark; that’s not diversified,”
he said. “50 per cent of the index is made up of financials.” Omega’s Global Credit Opportunities strategy
seeks to generate a return greater than Barclays Capital Global Aggregate Index
over rolling three year periods, and control risk by maintaining a broadly
diversified portfolio of corporate bonds from around the world. No more than
0.75 per cent of the portfolio is invested in a single issuer.
