Time to increase your allocation to credit?

Key reasons for this move towards credit include the potential to access yield and the evolution of portfolios towards endgame preferences, including buy-in, buyout and run-on.

However, credit spreads are currently at multi-year lows, leading some schemes to question whether this is an opportune moment for action. 

Insurers who tend to price their buy-in and buyout transactions with significant credit exposure are tactically factoring in a little less credit responding to the current tight spreads.

As such, pension schemes targeting buy-in or buyout are mirroring this and slightly revising down this allocation to 20-40%* – though this target would still be significantly above that currently achieved by many schemes. Those schemes targeting run-on are also following this trend.

What practical measures can schemes take now?

Credit spreads are strongly mean reverting in nature, which argues for patience – i.e. waiting to see if credit spreads widen. However, can investors afford to pass up the carry (the additional return that can be earned over the holding period of the investment from credit versus gilts) from credit while waiting given that credit spreads could remain tight for a considerable period? 

Here are some practical considerations for schemes looking to deploy capital into credit:

These different approaches means that we believe there is an appropriately tailored route suitable for most investors and we’ve seen schemes implement them in both the insurance and pension scheme space. 

Key risk

The value of investments and the income from them can go down as well as up and you  may not get back the amount invested. Past performance is not a guide to future performance.

*credit spread exposure compared to interest rates