Strong conviction is essential for active fund managers: it shows belief in the prospects of favoured securities and is often necessary to outperform the market. But the portfolio concentration of active UK-domiciled credit funds is lower than many investors would think: 60% of funds allocate less than one-third of assets to their top 10 positions*, showing little conviction in their largest holdings and resulting in the majority of portfolios increasingly resembling the index.
Following the current credit market is risky. As more capital chases the same opportunities, investors become exposed to intensifying valuation and liquidity risks and to new bond structures that constrain returns. Risk increases while prospective returns diminish. What can investors, and the active managers they appoint, do to revive high-conviction credit investing?
Find out more in the latest issue of Spectrum, our global credit newsletter. *Source: Bloomberg 30/09/14