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Sterling investment grade credit gets overcrowded: PLSA report

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Fixed income’s return to favour following widespread interest rate rises has led to investors overcrowding sterling investment grade credit, delegates at the Pensions and Lifetime Savings Association investment conference have heard. Gill Wadsworth reports.

Matt Livas, Head of Client Portfolio Management for Barings public fixed income team, said UK pension funds invest 36 per cent of total portfolios to domestic corporate bonds – an increase of 6 percentage points over the past year – and warned they may be overexposed.

“Crowding into an asset class which may not have great liquidity can be damaging; we saw that with the gilt crisis in 2022. Investors should think about diversifying by type of credit and geographically,” Livas said.

The sterling investment grade credit market is currently worth around GBP400 billion and comprises one thousand securities. In contrast, the global investment grade market is worth GBP30 trillion and boasts 20,000 securities.

“The global investment grade credit market offers a much bigger opportunity to generate alpha. There are more maturities and more diversity. The global investment grade market outperformed the UK market by 1 per cent per annum over the past five years,” Livas said.

Livas also made the case for investing in high yield credit, arguing that considering the more positive macro-economic outlook, there was less chance of issuers defaulting.

“High yield credit is still referred to as junk bonds which is unfair. The high yield space is higher quality than ever before and there is greater liquidity, and includes some household names such as Vodafone and Rolls Royce. And if you look at the returns, high yield delivers 7.5 per cent while yields from investment grade is 5.5 per cent.”

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