Lessons learned from years of global credit investing | Insight Investment

Global investment grade credit has witnessed strong inflows due to its offer of attractive yields from high quality companies. Adam Whiteley, Head of Global Credit at Insight Investment, answers the questions on this topic.

How has the landscape changed over the past decade?

The most obvious change is that in 2016 yields were very low. That has now improved greatly and attracted large inflows to the asset class.

A less obvious change is the growth in automation in the trading of global credit markets. Where one would have previously interacted over the phone with someone at an investment bank, a lot of trading is now done on electronic platforms. This means faster execution, quicker information flow and an improvement in liquidity. So, the ability to buy and sell at the time you want, at the size that you want, at a price that you want, is arguably now better.

What were the three big calls you made 2016-2026?

Cautious in late 2019: Our process flashed a warning sign at how good news was driving up prices in late 2019. Our cycle analysis suggested valuations were too high, so we dialled down risk. This protected us from the worst as valuations fell over the next few months.

Long on risk in April 2020: We recognised the human impact of the pandemic, but we also saw that markets had become too fearful. Credit valuations were not factoring in the support from central banks and governments on its way.

Overweight Europe in 2022: European credit markets were harder hit than US markets in 2022. The sharp rebound in inflation and interest rates hurt more because the outbreak of war in Ukraine sent European energy prices soaring. We looked through these shorter-term issues to go overweight on European credit – that proved to be the right call as valuations normalised over the next two years.

How are you future-proofing your strategy?

We already have a process that aims for incremental gains, but that doesn’t mean we can be complacent. As part of a commitment to continuous improvement, we are increasing the use of quantitative analysis.

Our investment process will always be a fundamental one, but we believe quantitative and new technology can increase efficiency and our edge. Examples include:

• quantitatively screening a universe of tens of thousands of corporate bonds to quickly see relative value,
• exploiting momentum as a factor in markets, and
• using modern trading protocols that tap into the ETF eco-system to reduce transaction costs.

What are the three key tenets of your approach?

• We believe in a consistently applied process that encourages incremental gains.
• We also believe that a global credit manager will benefit from a physical presence in both the US and Europe to ensure the very best security selection.
• It is important to have careful risk controls – Insight supplements human analysis with quantitative signals to offer early warnings of default risk.

Why take an active approach to global credit markets?

The advantage of taking a global approach to investment grade credit is both diversification and a bigger opportunity set. We believe active credit managers have greater scope to exploit an inefficiency in how fixed income securities are priced than global equity managers. Empirically the median active fixed income manager outperforms the benchmark¹; by contrast active equity managers are much less successful.