Alternative credit hedges risk while boosting returns

Alternative credit continues to offer compelling opportunities within fixed-income portfolios, and should complement an existing core bond allocation, says Gino Di Censo, vice-president, Global Fixed Income, CIBC Asset Management.

“An alternative credit strategy may not completely avoid drawdowns, but we think it can provide larger upside potential and recoveries,” he said in a Feb. 23 interview. “We think, given its underlying characteristics, use of leverage, [and] hedging of interest rate risk, that it really provides a good complement to a private market exposure, which exhibits less upside coming out of market shocks.”

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

With central bank policy, political pressures and geopolitical risks continuing to impact inflation and interest rates, he said a rate-hedging strategy offers a way to access opportunities in alternative credit.

“What a rate-hedging strategy is designed to do is isolate the credit spread return in a portfolio so that it’s really a pure play credit investment,” he said.

Di Censo added that a pure play credit approach in alternative credit allows him to prioritize company health and sector dynamics over interest rate and duration risks.

“Those obviously factor in all of our investment decisions, but if we really like an underlying issuer and truly understand the underlying fundamentals, we can have a high conviction that we can invest in this company, and people take advantage of the pure credit without having any extraneous factors, such as interest rates, impacting that overall credit.”

In today’s market, where valuations are rich and spreads are tight, Di Censo is reducing overall leverage, and focusing on more resilient, less economically sensitive names.

“You want to be mindful of your positioning in an alternative credit strategy, and maybe adjust your timeline to be tactical in your investment allocations,” he said.

Despite elevated valuations and the risk of spread widening, Di Censo said there can still be attractive value in the underlying business, along with the opportunity to position more defensively through higher-quality, investment-grade credit. He likes non-cyclical names, like Enbridge from a pipeline and energy perspective, as well as banks from a financial perspective.

Liquidity is also key for when spreads do eventually widen, he said. “We can tactically take advantage and increase our investments in maybe more cyclical names, or increase our leverage, which is currently about half of where it can ultimately end up.”

Overall, Di Censo said that an alternative credit strategy can provide “a multitude of opportunities” alongside core bond exposure in fixed-income portfolios.

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.