Investment Grade Quarterly Update – October 2020
Our investment grade funds aim to deliver consistent risk-adjusted returns by limiting their investment universe predominantly to securities deemed to be higher quality and at a lower risk of default.
Portfolios are managed against a reference index or with a defined target return. The team’s high conviction approach is heavily based on managing risk and limiting volatility, while targeting relative value by geography, sector and security to deliver alpha for the portfolio.
Funds invest predominantly in investment grade, fixed rate bonds, though portfolio managers have the ability to make limited allocations to high yield bonds and asset-backed securities (ABS), if they feel prevailing market conditions mean they are required to deliver on the mandate..
Investment grade bonds are fixed income securities issued by companies with a medium or high credit rating from a recognised credit rating agency, which are considered to be at lower risk from default than those issued by companies with lower ratings.
Bond investors face ‘asymmetric risk’ when making investments, in that the expected loss associated with a company defaulting on a bond is typically greater than the expected return on the security should the company repay the debt as planned.
Investment grade bonds are those rated BBB- or higher by at least two recognised credit ratings agencies, the biggest three of which are Moody’s, Standard & Poor’s and Fitch (bonds rated lower than BBB- is considered ‘speculative grade’). IG bonds achieve higher ratings because they are deemed to be at lower risk of default, meaning investors are typically prepared to accept lower yields for holding this debt than for lower rated bonds from riskier companies.
As such, strategies that keep a core allocation to investment grade securities can expect a smoother risk and return profile than those focused on the potentially higher capital gains associated with lower rated bonds.
It is important to note that TwentyFour does not rely on the judgment of external ratings agencies to determine whether one bond is riskier than another. Portfolio managers conduct their own rigorous credit analysis on every potential investment, regardless of the company or bond’s rating.
TwentyFour’s investment grade strategies are designed to be held as a core fixed income allocation that can deliver steady, repeatable returns throughout the economic cycle.
Investment grade bonds are widely held by institutional investors, so they tend to be more liquid and less volatile than lower rated bonds.
They offer higher yields compared to investment grade government bonds.
Relatively low default risk means investors can have greater certainty on expected returns.
The investment grade bond universe offers extensive diversification, with virtually every corporate sector represented in the global market.
Investment grade bonds have the potential to provide steady income