Remove restraints and diversify: Perpetual

Yasmine Raso

Senior Journalist, Financial Newswire

26 May 2023

Investors have been encouraged to remain open and invest broadly across a range of diversified issuers, industries, countries and asset types as credit markets suffer through a challenging tightening cycle.

Perpetual’s Managing Director, Credit & Fixed Income and Perpetual Credit Income Trust manager, Michael Korber, said while a “tighter, more challenging environment” is coming it will also be prime time for quality investors to jump on real opportunities.

“The recent events involving the US regional banking sector was just a further headwind in a market environment already facing up to a spike in inflation and lower economic growth,” he said.

“All of these headwinds lead to liquidity pressures in financial markets, making it harder to borrow money in the short term, but also raising refinancing risks for even good borrowers over the next couple of years.

“At the same time, the rising interest rate environment provides the potential for rising income and distributions in a floating rate portfolio which can contribute significantly to returns.”

Korber also highlighted the importance of diversifying portfolios across not only several issuers or levels of credit quality, but also the spread the risk across a range of sectors, industries and asset types such as bonds, residential mortgage-backed securities (RMBSs)/asset-backed securities (ABSs) and corporate loans.

This sentiment was also echoed by Michael Murphy, Senior High Yield Analyst at Perpetual and Portfolio Manager of the Perpetual Loan Fund, who stressed value of fundamental research to select quality issuers when it comes to constructing portfolios.

“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,” he said.

“We have very little exposure to consumer discretionary companies, and we also seek to avoid 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.

“Our continued focus on maintaining a healthy running income and diversification positions us well looking ahead and the market volatility will continue to provide some attractively priced fixed income opportunities to generate returns for the portfolio.”