Broadening global investment-grade horizons

UK investors considering whether to allocate to global investment-grade credit may discover the broader diversification benefits can significantly improve a portfolio’s overall risk dynamics.

4 minute read

Broadening global investment-grade horizons

UK investors have traditionally allocated to gilts and other sterling-denominated investment-grade bonds for the “safer” fixed income part of their portfolios, choosing to get direct exposure to other currencies through their equity and alternative allocations. In terms of geographies, around 50 per cent of the sterling market is comprised of global companies such as Unilever and Procter & Gamble, indirectly adding exposure to other economies.1

Yet, while the sterling investment-grade market is robust, broadening an allocation further – to global investment-grade credit – can deliver significant diversification benefits. Global investment-grade bonds achieve lower volatility for similar levels of excess returns or spreads, even accounting for the hedging costs associated with mitigating currency risk.

A world of possibilities

At A-, the global investment-grade segment’s average credit rating is just one notch below sterling’s (A), while offering a market capitalisation approximately 13 times larger – and more than four times the number of issuers, with much greater diversification across sectors. For instance, banking accounts for over a quarter of the sterling index.

Figure 1: Size of the global and sterling investment-grade markets
Size of the global and sterling investment-grade markets
Source: Bloomberg Barclays Global Aggregate corporate Index hedged USD, iBoxx sterling investment-grade non-gilts, as of 31 December 2019
Figure 2: The global investment-grade market is more diverse
The global investment-grade market is more diverse
Source: Bloomberg Barclays Global Aggregate corporate Index hedged USD, iBoxx sterling investment-grade non-gilts, as of 31 December 2019

Shorter duration, lower volatility

In terms of portfolios’ risk budgets, global investment-grade credit is also attractive because its duration is a year shorter than the sterling index – at 6.82 years and 7.9 years respectively.2

This means that, while sterling spreads are typically wider than their global counterparts, when adjusted for duration the difference is small. This modest spread differential is also largely explained by the fact the large, predominantly US dollar-denominated, global investment-grade market is much more liquid than its sterling equivalent.

Figure 3: Comparing global and sterling option-adjusted spreads across credit ratings
Comparing global and sterling option-adjusted spreads across credit ratings
Source: Bloomberg Barclays Global Aggregate corporate Index hedged USD, iBoxx sterling investment-grade non-gilts, Aviva Investors, as of 31 December 2019. Numbers indicate OAS spreads divided by the duration of the index

The reward for bearing credit risk is therefore comparable on both markets, with spreads of global allocations exhibiting lower volatility over five and ten years, giving investors a smoother journey (see Figure 4). The volatilities shown below are not adjusted for duration, but the duration-adjusted volatility of the sterling investment-grade index is also higher than that of the global index.

Figure 4: Volatility of spreads over five and ten years
Volatility of spreads over five and ten years
Source: ICE BofAML, Aviva Investors, as of 31 December 2019

Currency bonus

Global investment-grade credit delivers a further diversification benefit because it is naturally tilted to a variety of currencies – mainly US dollars, but also Australian dollars and Japanese yen among others. By systematically hedging currency exposures back to the base currency, global investment-grade funds benefit from this diversification but without trying to guess which way currencies will move.

Indeed, foreign-exchange markets are so volatile that trying to second guess their direction to generate alpha is fraught with risk. Instead, when portfolios are hedged back to the base currency, portfolio managers remain free to focus on adding value through the quality of their credit selection.

References

  1. Source: ICE BofAML, as of 31 December 2019
  2. Source: Bloomberg Barclays Global Aggregate corporate Index hedged USD, iBoxx sterling investment-grade non-gilts, as of 31 December 2019

Author

Want more content like this?

Sign up to receive our AIQ thought leadership content.

Apologies, this content is currently unnavailble.

Please enable javascript in your browser in order to see this content.

I acknowledge that I qualify as a professional client or institutional/qualified investor. By submitting these details, I confirm that I would like to receive thought leadership email updates from Aviva Investors, in addition to any other email subscription I may have with Aviva Investors. You can unsubscribe or tailor your email preferences at any time.

For more information, please visit our Privacy Policy.

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL) as at February 2020. Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment.

In the UK & Europe this material has been prepared and issued by AIGSL, registered in England No.1151805. Registered Office: St. Helen’s, 1 Undershaft, London, EC3P 3DQ. Authorised and regulated in the UK by the Financial Conduct Authority. In France, Aviva Investors France is a portfolio management company approved by the French Authority “Autorité des Marchés Financiers”, under n° GP 97-114, a limited liability company with Board of Directors and Supervisory Board, having a share capital of 17 793 700 euros, whose registered office is located at 14 rue Roquépine, 75008 Paris and registered in the Paris Company Register under n° 335 133 229. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material.  AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1Raffles Quay, #27-13 South Tower, Singapore 048583. In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 30, Collins Place, 35 Collins Street, Melbourne, Vic 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom. Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager. Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”), and is a member of the National Futures Association (“NFA”).  AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.

Related views