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What are the credit opportunities in a low-yield environment?


Sean Markowicz, CFA

Sean Markowicz, CFA

Strategist, Research and Analytics

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Our 2019 Schroders Global Investor Study found that 79% of consumers are investing for a return of 4% or more. Yet, the traditional sources of income such as government bonds are no longer sufficient to meet this objective. Interest rates are at near record lows and higher-yielding assets are in short supply.

To solve this conundrum, many investors have been buying riskier debt to make up for the shortfall in returns. Although this approach may have done well thus far, we do not believe this is a prudent investment strategy going forward. It can expose investors to unpleasant surprises when the next economic downturn arrives, which is inevitable at some point.

However, that does not mean that credit investors should be forced to accept the paltry yields on investment grade corporate bonds as the best they can hope for. Our analysis shows that better portfolio outcomes are possible for two reasons:

1. Significant variability in returns across different segments of the credit universe mean that there are opportunities to generate higher returns by varying allocations over time. This can be achieved without the need to have a large structural exposure to the riskiest bonds.

2. Significant variability in returns and yields between securities within each segment mean that it is possible to earn a higher return or income than each segment overall. This potential source of additional return has historically been greatest in those environments when credit returns have been under pressure.

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