Find opportunities from disruption
Sort through the noise of volatility by exploring exciting possibilities here.
How could investors navigate disruption and market noise?
In today’s disruptive climate, it’s important for investors to stay on top of market changes like rising rates and inflationary pressures. Being able to quickly and strategically respond can enhance returns and mitigate risks to portfolios.
▶ Find a path for your investment that makes sense
Where can investors put their capital in these uncertain times? How to capitalize on rising rates and staying agile against volatility? We think it’s about understanding what matters to you and finding capabilities to maximise your portfolio.
▶ Focus on strategic allocations, not riding along market sentiment
To guard against uncertainty, be selective about your investment exposures. Look beyond the obvious and explore something different to build a stronger, more diverse portfolio.
▶ Add portfolio resilience in the face of a new, volatile future
Markets can be fickle, but investors can protect their portfolios by using select capabilities as hedges. The time is now to reduce downside risk and seek total return potential across periods.
A trusted partner in volatile times
We work with investors as a trusted partner and help find opportunities to capitalize on any market cycle, regardless of the timing. We think now is the time to act and capture new possibilities.
Navigating market challenges with senior loans
Bond yields have been gradually rising and spreads widening, but the gains haven’t been enough to offset inflation. From market volatility to interest rate hikes, fixed income investors are experiencing a challenging environment.
Our private credit strategies allow you to tap into more attractive yields, while giving you a degree of flexibility around interest rate changes. With over 30 years' experience and a significant presence in all areas of the market, we can help you go further in the hunt for income and returns. Today, our assets under management total US$44+ billion¹.
Senior loans offer a combination of appealing characteristics to help combat a low (and rising) yield investment landscape. Senior Loans has seen demand from investors across the globe as their attractive yield, compelling relative value, and diversification properties led to the asset class experiencing inflows.
High income
Senior loans offer the potential for consistent monthly income and strong risk adjusted returns. The goal is to provide you with equity-like returns but with credit-like risk.
Floating rate feature
Removal of interest rate risk and short duration may deliver strong returns across different market conditions. We primarily invest in adjustable rate senior loans whose interest rates float and typically reset every 60 days.
Diversification potential
Uncorrelated returns when compared to traditional listed equities and bonds may drive strong income and reduce volatility.
| Benefits of Investing in Senior Loans | Rising Rate Environment | Recessionary Environment | |
|---|---|---|---|
| High income | Potential for consistent monthly income and strong risk adjusted returns. |
The effect of the Fed’s policy on interest rate is just starting to increase the monthly income that bank loans distribute. Every increase in rates increases coupon for loans. |
Loans provide relatively stable income throughout all periods. Historically, coupon income has been consistent, even during extreme recessionary periods, such as the GFC. |
| Floating rate feature | Effective duration of 0 years, no interest rate risk. “Pure” credit exposure, no duration risk. |
Floating rate is positive in a rising interest rate environment. Loans are starting to reflect higher coupons from rate resets adding to higher future return potential. | Interest coverage ratios hit a record high in 2Q 2022 showing that issuers have a strong cushion to weather the impact that a recession might have on issuers cash flow. |
| Compelling relative value | Loans offer one of the best yields in fixed income despite their senior secured status.² |
Loans offer one of the highest yields in fixed income with no duration risk. This will be more compelling as the rising interest rate trajectory continues. | Loans offer higher yields than core bonds, while providing more downside risk mitigation by being senior secured in the capital structure relative to high yield bonds. |
| Diversification potential | Low correlation with traditional asset classes.³ Historically, has reduced volatility and increased returns when combined with IG fixed income.³ |
In a rising interest rate scenario loans further protect investors from interest rate parity and negative price movement on bonds. | While recession risks might cause broad risk-off or market selloffs, loans typically have less volatility and lower drawdowns, insulating some of the negative effects. |
| Senior secured status | Highest priority to be repaid; lenders have first right to collateral in the event of a default Higher recovery in case of default. |
Loans offer investors an opportunity to move up the capital structure with better downside risk mitigation in a recessionary environment. |
For illustrative purposes only. Source: Invesco, 31 July 2022.
Being strategic with fixed income
Whether you're looking for income, stability, tax efficiency, or total returns, our investment grade capabilities are designed to deliver, even under stressed market conditions.
We strive to be masters of volatility and agility
We actively monitor data to manage intra-cycle volatility in pursuit of long-term, risk-adjusted performance during each cycle and across every economic regime.
Thematic investment
We identify investment themes, which we believe can perform well in all market conditions. Additional macro overlays are designed to potentially reduce downside.
Broad opportunity set
Our global investment universe allows us to take advantage of a broad opportunity set.
Generating attractive risk-adjusted returns in any market environment?
We believe we can generate attractive risk-adjusted returns by targeting alpha through global thematic ideas. These are implemented within a robust, risk-disciplined framework with the intention of performing well in any market environment.
Lyndon Man, Fund manager & Co-Head Global Investment GradeI believe our thematic approach to investing will be key to delivering attractive risk-adjusted returns going forward.
Key investment themes
Trends:
- Europe: (Early to Mid credit cycle) Financial Conditions Easy, Deleveraging, Bondholder friendly activity, Balance Sheet Conservatism, Improvement in Earnings
- US: (Late credit cycle) Financial Conditions Stable, Releveraging, Shareholder friendly activity (M&A, share buybacks, dividend focus, Earnings Strong)
Impact:
- Fundamental Conditions and behaviour of corporates favourable for European credit
- However, though US Credit is late cycle, the period of expansion can remain elongated and has been supported by fiscal stimulus
Opportunities:
- Preference of European Credit over US Credit
- However, need to differentiate within European regions given degree of fragmentation
Trends:
- Capital Strength: Regulation has induced strong balance sheet deleveraging via capital build and risk reduction.
- Asset Quality Improvement: Decline in Non-Performing Loans via growth, low rates, structural reforms & restructuring (bank banks, consolidation).
Impact:
- Bank Balance sheet significantly improved since the GFC both in terms of the quality and quantity of assets
- Allows strongly capitalised banks to lend out their balance sheet
- Low rates leads to profitability concerns but minimises default & hence reduces LGD concerns
Opportunities:
- We favour strong, well-capitalised banks in jurisdictions where their respective regulators require larger capital requirements than Basel 3/4.
- Differentiation across the capital structure and regions.
Source: EBA Risk Assessment, 2020 Report on NPLs. For illustrative purposes only.
Trends:
- Demand side destruction due to pandemic crisis; however, this is temporary though uncertain
- Supply side flexibility available and likely to see further Opec Plus support should oil situation deteriorate as no winners for all below their breakeven levels
Impact:
- Volatility in oil prices will remain until pandemic situation sees more visibility
- However, level of oil prices is already quite distressed and factoring a lot of uncertainty
Opportunities:
- We favour strong vertically integrated energy corporates that have exposure across the different oil capstack eg: upstream to downstream
- Focus on high quality EM sovereigns in the middle east who are able to dictate oil production
Trends:
- China is focusing on transitioning into a Consumption-led economy from a low-cost manufacturer.
- Rising consumerism after decade of export driven growth, which is supported by a growing middle class and urbanisation.
Impact:
- Growth stability and focus on quality
- Strong Ecommerce trends and initiatives (B2C, O2O)
- Social media importance and mobile commerce creating a digital online payment society
Opportunities:
- TMT Sector – Oligopoly congomerates (private players).
- SOE Consolidation – Systemically important state-owned players.
Source: China GDP Distribution 2020, Statista. For illustrative purposes only.
Enhance portfolio outcomes with real estate allocation
With a generally lower correlation to other asset classes, real estate can serve as a diversifier in a mixed-asset portfolio. Historically, it has delivered strong relative performance across multiple cycles compared to other asset classes, and its characteristic stable income, underpinned by long-term leases, makes it a compelling alternative to traditional fixed-income instruments. In the wake of 2020, investors are increasing their allocations to alternative investments: 90% of investors intend to maintain or increase their allocations to real estate over the long term⁴.
Diversification
Historically low to moderate correlations to other asset classes.
Inflation protection
Real estate income has historically kept pace with inflation.
Potential income yield
Durable income return potential even during market downturns.
Real estate as an inflation hedge
Real estate assets have been mildly positively correlated to inflation since 2010, rather than the typically negative correlation seen in equities or bonds. While table 1 shows the relationship for the past decade, we are clear that this is a period when inflationary pressures were relatively benign, and inflation globally was largely trending lower. Taking a long-term view that the post-2020 global economic environment is expected to follow a similar pattern to the post-GFC recovery, with steady economic growth while countries seek to effect a gradual, controlled reversal of the recent balance sheet expansion, the period shown in table 1 may provide some indications to the expected performance of real estate going forward.
Source: Green Street Advisors, Bureau of Labor Statistics as of March 31, 2022.
1. Net operating income (NOI) growth is the average NOI growth by year across the major property sectors in North America: apartment, industrial, mall, office and strip retail. NOI growth equals all revenue from a property minus all reasonably necessary operating expenses. NOI growth may not be correlated to or continue to keep pace with inflation.
2. Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a representative basket of goods and services.
Diversification benefits with real estate
- Historically low to moderate correlations to other asset classes.
- Investors’ appetite for real estate is spurred in part by the asset class’s generally stable income component. Across the globe, income returns as a share of private real estate total returns are generally quite high.
- When considered as part of a mixed-asset portfolio, the income return from real estate, both public and private, becomes even more compelling.
| Correlation Matrix | US Listed Real Estate | US PrivateReal Estate |
|---|---|---|
| US Stocks | 0.58 | 0.11 |
| Global Stocks | 0.57 | 0.11 |
| US Bonds | 0.20 | -0.18 |
| Global Bonds | 0.29 | -0.15 |
Available data is from 1 January 1990 to 31 December 2021.
Note: US Real Estate represented by FTSE Nareit All Equity REITs Index; Global Listed Real Estate represented by FTSE EPRA Nareit Developed Index; Global stocks represented by MSCI World Index; US stocks represented by S&P 500 Index; US bonds represented by Bloomberg US Aggregate Bond Index; Global bonds represented by Bloomberg Global Aggregate Bond Index; US Listed Real Estate represented by FTSE Nareit All Equity REITs Index; US Private Real Estate represented by NCREIF Property Index.
Source: Bloomberg. An investment cannot be made directly in an index. For illustrative purposes only. Diversification does not guarantee a profit or eliminate the risk of loss.
Footnotes
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1 Source: Invesco as of July 31, 2022. $40+ billion indicates assets under management across Invesco’s Private Credit Platform.
2 Source: CS LLI and CS WELLI as of July 31, 2022.
3 Source: S&P/ LSTA LLI as of July 31, 2022.
4 Source: 2021 Preqin Global Real Estate report.
LGD: Loss given default
B2C: Business to consumer
O2O: Online to offline
TMT: Technology, media, and telecom
SOE: State owned enterprise
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Past performance is no guarantee of future returns.
Most senior loans are made to corporations with the below investment-grade credit ratings and are subject to significant credit, valuation and liquidity risk. The value of the collateral securing a loan may not be sufficient to cover the amount owed, may be found invalid or may be used to pay other outstanding obligations of the borrower under applicable law. There is also the risk that the collateral may be difficult to liquidate, or that a majority of the collateral may be illiquid. Compared to investment grade bonds, junk bonds involve greater risk of default or price changes due to changes in the issuer’s credit quality. Diversification does not guarantee of profit or eliminate the risk of loss.
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