An allocation to investment grade corporate bonds could offer compelling opportunities within a well-diversified portfolio.

2020 proved to be a volatile and unprecedented year for markets in many respects, not least in terms of the amount of stimulus provided by both central banks and governments. It served as a stark reminder of the benefits of a well diversified approach as well as the importance of downside protection.

With this in mind, the role that fixed income plays within a well-diversified portfolio comes sharply into focus, with investment grade credit having a central role in terms of its potential to generate attractive risk-adjusted returns.

An inherent bias for many investors though is to remain focused on one’s own regional market when considering investment options. However, compared with purely regional approaches a global investment universe can offer several advantages, not least in terms of a divergence of yield sources and risk. In this paper, we will examine the various benefits of adopting a global approach to corporate bond investing, namely:

 

1. Increased issuer diversification and scope to add value for an active manager when selecting bottom-up opportunities
2. Access to a broader, deeper and less concentrated corporate bond market
3. A yield pick-up (after hedging) for euro-based investors when compared to euro corporate bond strategies

This could offer the opportunity to make a meaningful contribution to a portfolio’s risk-reward profile while being mindful of overall portfolio risk.

Divergence of yield sources and risk

Expanded opportunity set

The global corporate bond investment universe currently stands at over US$11 trillion¹. By comparison, the US dollar, euro and sterling corporate bond markets are much smaller, as illustrated by the graph on the next page. Moreover, the opportunity set for global investors comprises 13,857 issues and 2,642 issuers¹, giving access to a much broader pool to select from compared with strategies focused solely on regional markets. The diversification potential this offers provides benefits not only in terms of issuer and sector selection but also from a geographical point of view, as the investible universe is made up of companies located around the world.

A large and growing global market²

Investment-grade corporate bonds: amount of debt outstanding (US$bn)

In addition to providing greater diversification, having access to a larger number of issues and issuers to select from also offers increased and more varied sources of alpha, thus providing greater scope for an active manager to uncover value through fundamental credit research.

Increased scope to generate alpha through bottom-up security selection²

Similarly, the potential to uncover value is increased where investors have access to a broader geographical opportunity set, as they are able to tap the most attractive investments wherever they exist across the globe. Moreover, there are some smaller markets within the global universe, such as the Canadian dollar market, which could present attractive investments but are too small to constitute a regional approach in their own right. A purely regional strategy, such as a euro corporate bond strategy for instance, would therefore miss out on those opportunities.

 

1 . Data as at 31 December 2020 for the Bloomberg Barclays Global Aggregate Corporate Index. Sources: Capital Group, Bloomberg Barclays.

2 . Markets refer to the Bloomberg Barclays Global Aggregate Corporate Index, Bloomberg Barclays US Corporate Index, Bloomberg Barclays Euro Aggregate Corporate Index, Bloomberg Barclays Sterling Aggregate Corporate Index

 

Risk factors you should consider before investing:

• This material is not intended to provide investment advice or be considered a personal recommendation.
• The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
• Past results are not a guide to future results.
• If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
• Depending on the strategy, risks may be associated with investing in fixed income, derivatives, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.