Why now is the time to "cherry pick" the best investments

An environment of tightening conditions and slowing earnings growth is creating some fascinating quandaries for investors.
Michael Korber

Perpetual Asset Management (Australia)

Credit markets are facing a challenging environment of tightening financial conditions and slowing earnings growth where risk management and quality assets are both more crucial than ever. 

Most recently, the impact of the sharp tightening of global monetary policy was observed in March as credit spreads were impacted by concerns over the strength of the global banking system. But we also believe that the credit outlook is improving and that's all flowing through to market sentiment and volatility. 

In this wire, I'll explain why we are more optimistic than most and how we are allocating assets as a result.

The changing outlook 

Our credit outlook improved slightly in the first few weeks of March but more recent events, including the collapse of SVB, Signature Bank and Credit Suisse, significantly changed market sentiment and volatility.

Whilst the epicentre was the US regional banking sector, the widening of credit spreads, softening liquidity, and risk aversion spread globally. All this has been a further headwind in a market environment already facing a historic inflation spike and a leg down in the outlook for economic growth.

All of this leads to liquidity pressures in financial markets, making it harder to borrow money in the short term. It also raises refinancing risks even for good borrowers over the next couple of years. All in all, I think we are going to see a tighter and more challenging environment going forward but it is also one that creates opportunity for our portfolio.

How we are positioned

The Perpetual Credit Income Trust is broadly a corporate credit portfolio, with a focus on large Australian corporates. As a result, the Trust has little exposure to global banking risks. 

Where PCI does have offshore exposure, these are in large and systemically important banking franchises. These franchises have big domestic markets and they meet our investment criteria of being quality issuers with good balance sheets, predictable cash flows and highly capable management.

More broadly, our portfolio is unconstrained which allows us to invest across the fixed-income universe. We’re not constrained to particular sectors or particular types of assets. In tough times this allows us to cherry-pick the best assets.

Focus on diversification

When it comes to positioning, we believe diversification is incredibly important. At the moment, we hold 127 assets across 91 issuers. Of these, more than a third are investment grade while more than half are in the high-yield space (sub-investment grade or unrated corporate credit).  

But diversification is not just about having a large number of issuers or different types of credit quality. We also spread the risk in the portfolio across a variety of sectors, industries, and asset types such as government bonds, RMBS/ABS, and corporate loans.

Above all, fundamental research is very important when identifying quality issuers to manage risk appropriately when investing in high-yield assets and loans offering attractive coupons. 

In terms of what we look for in the portfolio, the borrowers are typically large corporates with a strong market position, significant economic moats and high recurring revenues that are resilient to economic downturns. A couple of examples would be consumer giant Arnott’s and  Colonial First State investment management.

In contrast, we have very little exposure to companies that have exposure to discretionary spending. We also have no exposure to property development, which is more dependent on economic cycles, and we’re mindful that many investors are already heavily weighted to the property sector with their own direct investments. This ties in with the earlier theme of diversification and our intention to provide retail investors access to credit assets that may typically be harder to access or only for the wholesale/institutional market.

Learn more

The Perpetual Credit Income Trust (ASX: PCI) employs an investment style that seeks opportunities within the broadest possible universe, providing diversification while at the same time managing risk during any point in a market cycle. Find out more here.

Perpetual Credit Income Trust
Australian Fixed Income
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Michael Korber
Managing Director, Credit & Fixed Income
Perpetual Asset Management (Australia)

Michael Korber is Managing Director, Credit & Fixed Income and is responsible for the ongoing strategic review and development of process, reviewing the weekly credit process and reviewing the analysis of all new credit securities. Michael joined...


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