Newspaper article The Journal (Newcastle, England)

Taking a Risk - but with Some Protection

Newspaper article The Journal (Newcastle, England)

Taking a Risk - but with Some Protection

Article excerpt

Byline: SHARE WATCH Andrew Miller

RETURNS of investment grade credit have reached double digits this year. Valuations look expensive but insurance bonds provide one pocket of value. In a portfolio context, a risk barbell approach provides some protection.

Investment grade credit offers a risk profile between government bonds and equity. Investors get the downside protection of a bond and regular coupon payments, but take on the added credit risk of purchasing a non-sovereign entity. Yields are typically higher than government bonds of similar maturities and have a direct correlation with the credit rating assigned to the issuer of company debt.

To be considered investment grade, a company must be rated at 'BBB' or higher by Standard and Poor's (S&P) or the equivalent by other rating agencies.

AAA is the highest rating that can be assigned by S&P and indicates that the borrower is reliable and stable. The asset class has a long history, especially in the US. Judged by Barclays Global Aggregate Corporate Index, the global investment grade bond market is currently close to $6.5 trillion in size, with the US comprising 48%.

The European and UK markets are not as established but have grown considerably in size in recent years. Industrial, Financial and Utilities companies constitute the largest issuers of investment grade debt.

Investment grade credit has been a big beneficiary of the search for yield, returning 10% year to date. Yields continue to break new lows with the Barclays Global Aggregate Corporate index currently yielding just 2.7%, compared to 4% at the beginning of the year.

Solid performance in the first half of the year gathered pace in the third quarter with Barclays Global Aggregate Corporate index returning 4% over this period. Financials were the main driver after lagging other sectors in the first half of the year. …

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