For the first time in a long time, areas within the credit markets are offering attractive yields—some even double-digit—that can buoy a client portfolio with only moderate risk, and these may be worth a financial advisor’s attention, investment experts said.
Speaking at Schwab’s IMPACT 2022 in Denver last week, Danielle Poli, managing director of multi-asset credit, and Wayne Dahl, managing director and investment risk officer, both at Los Angeles-headquartered Oaktree Capital, said that given the current environment, equity returns might remain suppressed for a while, and while the Fed may slow interest rate hikes, an about-face is unlikely.
“The definition of ‘pivot’ has changed. It’s no longer turning around and taking down rates, but doing less than they expected,” Poli said, adding that last week’s 75-basis-point hike could be viewed as a pivot in light of a 100-basis-point expectation. That ,plus a stock market that’s still reaching for bottom, had Poli confident about return prospects in her niche.
“It’s a reason why we think credit is highly attractive today and an opportunity to get equity-like returns,” she said during a panel called “Choose Wisely: A Contrarian Approach to Finding Relative Value in Today’s Credit Markets.” “We’re excited to share some of the areas we’re investing in.” Oaktree, a global alternative investment manager, has $160 billion in assets under management.
The areas of particular interest are high-yield bonds, senior loans, collateralized loan obligations (CLOs), commercial mortgage-backed securities (CMBS), and direct lending, which are seeing superior returns at the moment, Dahl said.
“First of all, what do we want from any fixed-income asset? We want yield. We want to earn that income. So what do we have today? High yield at the end of September was near 10%,” he said. “Loans, because they benefit from higher rates, was actually a little higher at 11%. CLOs really have outsized yield at 15%-plus.”
Real estate and direct lending have seen more of a range, with yields from 9% to 15%, he said.
A key to navigating the credit markets is having a multi-asset portfolio that considers the returns of an investment along with its volatility and liquidity, he said. For example, direct lending can be considered very foundational in this kind of portfolio.
“One of the key aspects for this strategy as part of a multi-asset portfolio is the low volatility that it does provide. It’s had consistent performance over the last five-plus years, and it is a great source of income matched with that low volatility,” he said. On the liquidity side, however, moving out of a position can be somewhat challenging.
“You can be in a strategy that has great potential returns, but has no liquidity or very high volatility and you can’t trade it when you want to move to something else. That’s what makes high yield always an appealing part of a portfolio. High liquidity and medium volatility,” Dahl said. “Loans have lower volatility but certainly trading them and receiving the capital is tough. CLOs and CMBS have a little higher volatility and the liquidity is a little behind that of high-yield bonds. And of course all the way down to privates where you have low to no liquidity, and that’s going to be a challenge if you’re going to want to move and shift to something else.”