Rate rise spells opportunity for alt credit

Institutional investors plan to increase their exposure to alternative credit this year even though an overwhelming majority expect US interest rates to rise over the next 12 months, according to a survey.

Some 94% of investors expect interest rates to rise over the next 12 months with 61% anticipating an increase of 0.5% or more. Also, 69% believe that quantitative easing in Europe will end by 2019 and there will be controlled rate rises.

Rate rises would be expected to lead to higher yields and therefore increased allocation to traditional fixed income. But in the event of controlled rate rises 37% of investors say they would increase their exposure to alternative credit, higher than any other fixed income asset class.

Several alt credit sub-asset classes have floating rate coupons, which benefit from rising rates and provide a natural hedge. Commercial and property loans and export credit agency loans are particularly beneficial and even infrastructure debt can have floating rate coupons.

NN Investment Partner’s ‘Investor Sentiment: Alternative Credit’ research reveals that over the next 12 months 14% of institutional investors anticipate they will start investing in alternative credit for the first time, while 45% who already invest in this asset class intend to increase their exposure. 

The findings reflect signs of increased interest in alternative credit, an asset class consisting of a range of loans to companies, organisations and projects outside of the regulated banking system.

Gabriella Kindert head of the alternative credit boutique at NN Investment Partners said alternative credit had become a much broader asset class with more investment opportunities.

She added: “If interest rates rise as predicted, it will look increasingly attractiuve when compared to traditional fixed income strategies.”

The survey found that obstacles to investing in alternative credit include understanding the risk profile, and a lack of relevant data and information.

©2018 funds europe

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