Weighing Credit Risk

Jul 1, 2011

Investors are turning to corporate bonds and moving down the ratings spectrum to boost portfolios. This may be part of a strategic shift, but are they weighing credit risk properly?

by Ben Miller

For fund managers who wish to outperform the index, corporate bonds have become an essential part of any portfolio now that spread tightening has run its course among large sovereigns and blue-chips. Investors are taking on greater risk as they reach further down the ratings spectrum. So far, funds are largely undeterred from venturing into junk territory in a region that boasts strong fundamentals, but the threats posed by broader problems in Europe and the US are starting to cause some pushback.

"Our outperformance versus the index really comes down to our focus on corporate credit in emerging markets," says David Robbins, manager of the TCW Emerging Markets Income Fund, which had the highest return among EM debt funds in the three years to May 31, according to Lipper data.

Corporates now dominate new issuance out of LatAm as investors seek higher yields through both dollar and...

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