Muzinich & Co.: More Bang for Your Buck

By Ian Horn, Portfolio Manager at Muzinich & Co.

Over the last year, global interest rates have converged at historically low levels. We believe this is unlikely to change in the near term. For many investors, cash deposit rates are in negative territory, so where else can they put their capital?

We believe an allocation to short-duration investment grade (IG) credit (0-3 years of duration) may offer an alternative. IG-rated bonds are the «least risky» segment of the corporate credit spectrum and can offer the potential for greater capital preservation than high yield.

Numerous opportunities for diversification

Globally, this 2.7 trillion dollar universe offers access to over 1,200 issuers in numerous countries and sectors, providing opportunities for diversification. Managers can navigate volatility and allocate accordingly, across the US, Europe and Emerging Markets.

An IG rating indicates low credit risk and we believe the BBB rating segment appears attractive. While these companies have earned an IG rating, a more sophisticated analytical approach may be necessary which is reflected in the potential returns.

Fundamental credit analysis is crucial

In our view, fundamental credit analysis is crucial to the generation of returns and to mitigate the risk of credit losses. In a short duration strategy, a greater focus on liquidity and cash flow is necessary given the shorter time horizon before maturity, and this can often be more important than longer-term sector trends and macro positioning.

For example, we believe the European banking sector is often still associated with the eurozone financial crisis. However, our credit analysis allows us to take a view on the creditworthiness of these issuers and thus enables us to identify undervalued opportunities.

New Opportunities

Looking at the global short-duration IG market at the end of 2020 and the end of 2019, many factors appear unchanged. The average rating has remained A- while the average spread over government bonds is just 1bp wider (62bps versus 61bps a year earlier).¹ However, yields are lower, thanks to the Federal Reserve’s 2020 rate cut and the strong rally in government bonds. As a result, a much larger proportion of the market is negatively yielding - particularly for EUR-hedged investors.² There is no doubt positive yields are harder to find.

Meanwhile, dispersion has increased, mostly in the BBB-rated market.³ This dispersion creates opportunities for those with the experience and analytical capabilities to identify mispriced credits. Assuming there is no default and the bond is held to maturity, the yield on a bond will be realized by the investor, with the pull-to-par effect helping to keep any drawdown short-lived.

Compelling opportunity in today’s investment environment

Short-duration bonds have low-interest rate risk, meaning they offer greater protection should interest rates rise. They also offer some respite from the costs of holding cash. Thus, in our opinion, by combining capital preservation, low credit and interest rate risk and strong liquidity, we believe the short-duration IG market may offer a compelling opportunity in today’s investment environment. Some strategies can also provide specific solutions that are tax-efficient solutions for Swiss investors.

• More Information

¹ ICE BofA 1-3 Year Global Corporate Index, as of 31 January 2021
² Bloomberg EURUSD Hedging Cost - FXHCEUUS Index, as of 31 January 2021
³ ICE BofA 1-3 year BBB Euro Corporate Index (ER41), as of 31 January 2021

Ian Horn joined Muzinich in 2013. He has portfolio management responsibilities on the firm’s investment grade and crossover strategies, as well as credit analysis responsibilities in European investment grade. Prior to Muzinich, Ian spent 2 years at the Royal Bank of Canada and previously worked at Lazard and JP Morgan. Ian earned a Masters in Engineering from the University of Oxford. Ian holds the Chartered Financial Analyst designation.

Important Information
Muzinich & Co. referenced herein is defined as Muzinich & Co. Limited and its affiliates. The above has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past results do not guarantee future performance. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity; they are for information purposes only. Opinions and statements of financial market trends that are based on market conditions constitute our judgement as at the date of the above. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. Certain information contained in the above constitutes forward-looking statements; due to various risks and uncertainties, actual events may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained in the above may be relied upon as a guarantee, promise, assurance or a representation as to the future. All information contained herein is believed to be accurate as of the date(s) indicated, is not complete, and is subject to change at any time. Certain information contained herein is based on data obtained from third parties and, although believed to be reliable, has not been independently verified by anyone at or affiliated with Muzinich and Co., its accuracy or completeness cannot be guaranteed. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland.