An Australian investment manager says it is time to think of floating rate assets and double-B rated credits as a safe haven in global debt markets.
Supervised Investments portfolio manager Phil Carden told a briefing in Sydney that double-B rated debt was cheaper five years ago, but globally it is still too cheap.
Carden, who oversees the Supervised Global Income Fund, says research indicates investors can make 700 basis points over LIBOR in the US market through a double B-rated corporate loan backed security. In Australia you can make about 560bps and in Europe you can make about 600, Carden says.
As part of a major growth strategy the investment manager recently won a US corporate debt mandate, signalling its first institutional mandate and more to come. In the past six months Supervised Investments has appointed Michael Ohlsson as chief executive and Helen Coonan as chair. It is bringing on a new analyst for the Global Income Fund in the next month.
Since inception in 2009, the Global Income Fund has achieved a return close to 10% annualised for the year to February 2017. It has typically invested in the Eurozone, Americas, Japan and Australia.
Carden expects the continued outperformance in the US market as inflationary measures continue under a Trump-led government. Already the "smart money" is borrowing long and lending short.
"People are locking in fixed rates for a long time because they see some increased interest rates coming," Carden said.
The fund's view is "normalisation" will increase existing floating rate cashflow and will not change on fixed rate cashflows.
"However, on debt security capital values, normalisation will increase the capital value of floating rate securities because everybody's is going to want them. No one is going to want to own fixed-rate securities," Carden said.
He adds floating rate securities will lift and that margins and credit spreads will continue to contract in the lower double-b sector of the market.
"Normalisation will decrease fixed-rate capital values, and it could be up to as much as 35% on 10-year fixed rate assets, and in addition to that there's going to be an abundance of supply," Carden said.
"Stop thinking about treasuries as a safe haven. Think about floating rate assets as a safe haven. Think about double-b credits as a safe haven. It's unlikely they'll go down by 35%, it's quite likely the fixed rate government bond will go down 35%."