Credit Continuum – April 2018

A healthy pick up in volatility provides increasing opportunities for active managers

With the talk of trade wars and a shifting central bank landscape, volatility has returned to virtually all markets. In periods of market stress, we have witnessed not only significant correlation between asset classes but also within asset classes.

This is as true today as it was in the depths of 2001/2002, 2008, 2011, and the 2013 taper tantrum.  During such challenging periods, there is generally nowhere to hide except for Treasuries – a traditional safe haven that carries its own risk related to its longer duration posture.

Over time, however, an increase in volatility should lead to a greater dispersion of returns among companies – making active management in credit all the more important.

We believe corporate credit, with its higher coupon and shorter duration posture, is well suited to protect investors from rate rises all the while providing income. An active manager will also be careful to avoid idiosyncratic, company specific issues.

Credit is a binary story after all – either a company defaults or it pays par at maturity.  An active manager that avoids defaults should help investors achieve a solid coupon stream throughout the market cycle.

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