LGIM's Reeves on the benefits of allocating to alternative credit

clock • 2 min read

Partner Insight: Diversification, a stable source of cash flow and expected returns in excess of expected defaults are among the benefits, says Martin Reeves, Head of Global High Yield at LGIM

One benefit I'd highlight is the provision of risk-adjusted returns. If you look at the returns that have been generated relative to the historical default experience, and expected default experience, they look very attractive, in our view. What we expect going forward is that pension schemes will be overcompensated for the expected defaults.

We believe that alternative credit asset classes are worth owning and we're fortunate that here at LGIM we have two world-leading teams in terms of fund managers. Our approach in general is to be diversified and perhaps this is one of the things that some trustees don't quite get; that high yield and emerging market funds are nowhere near as concentrated as you might find in an equity portfolio. So the funds are generally well diversified. We aim to attract a beta component as well to make sure we get a nice steady flow of income.

We're also aware of what our downside can be. If you can manage your downside, then you can improve returns. But again, if we're being active, we're going to be dynamic and if we think we're going into a default cycle, we're going to change the profile of the companies we buy. And if we're in a good part of the cycle, we will be buying slightly different companies that we expect to improve returns and bolster the income during the cycle that the pension funds can invest.

That's why we don't think buy-and-maintain works in high yield, because you have to be looking forward six to 12 months and thinking ‘what is the right way to have the portfolio positioned for any forthcoming change in markets?' We expect this dynamic approach of being diversified and understanding what the downside is, to improve risk-adjusted returns.

Click here to learn more about the strategic benefits of alternative credit and how it can improve investors' risk-adjusted return profiles

More on Investment

PPF publishes 2023/24 responsible investment report

PPF publishes 2023/24 responsible investment report

Lifeboat fund says it has engaged with 667 companies on ESG objectives

Martin Richmond
clock 07 November 2024 • 4 min read
Market Movers Blog: Dollar and US bond yields surge as Trump inches closer to victory

Market Movers Blog: Dollar and US bond yields surge as Trump inches closer to victory

Latest news and analysis

Investment Week
clock 06 November 2024 • 1 min read
Unnamed scheme becomes first in UK to allocate to Bitcoin

Unnamed scheme becomes first in UK to allocate to Bitcoin

Cartwright advised an unnamed scheme on a 3% Bitcoin allocation in October

Jasmine Urquhart
clock 04 November 2024 • 2 min read
Trustpilot