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Reflecting the growing interest from clients and prospects in fixed-income solutions, Federated Hermes today announced the appointment of Anna Karim as Investment Director in its Fixed Income team in London.

Markets have been roiled by extreme volatility through the course of March, driving major dislocation between recent price action and intrinsic value. Andrew Jackson, Head of Fixed Income at the International Business of Federated Hermes, assesses four sectors where pricing and value seem particularly distorted.

In the latest 360°, Hermes’ Fixed Income Quarterly Report, Andrew Jackson, Head of Fixed Income at Hermes Investment Management, explores how investors can navigate the growing negative-yield credit landscape.

Turbulence, disruption and uncertainty have always provided instances of opportunity for the savvy fixed income investor.

Strong credit fundamentals, stable leverage, low default rates and high interest coverage, means that global fixed income markets are currently a profound shade of vanilla. So says Andrew Jackson, Head of Fixed Income at Hermes Investment Management, in his quarterly market update. As a credit investor, my natural outlook is pessimistic to catastrophic. Despite all of my natural instincts, across the corporate world, balance sheets look robust, leverage is not imperiling companies and interest coverage ratios are good – even when likely interest-rate increases are taken into account. True, the financial state of the UK high street is ugly, but we do not think that its current wave of defaults and restructurings is a forerunner of the much-anticipated end of the credit cycle. We may have to wait longer before that happens. As liquid credit curves have steepened, we prefer longer maturities. At the long end, there is an attractive combination of relative under-ownership, superior roll-down and convexity. In emerging market (EM) credit, our appetite is for investment grade over high yield. Since 2015, there has been a lack of dispersion risk priced in to EM high yield compared to EM investment-grade credit. As a result, we prefer investment-grade to high-yield EM issuers, particularly when the company demonstrates improving environmental, social and governance (ESG) fundamentals. At a regional level, the underperformance of Latin America on a year-to-date basis creates an opportunity for tactical allocation of capital to this region. We have seen UK and European yield private debt premiums shrink due to stronger UK growth. There has also been a significant improvement in the UK mid-market M&A pipeline, causing pricing competition to fall and midmarket loans are now providing a yield premium of about 85-100bps relative to euro-denominated loans. The retail and hospitality sectors, which are currently experiencing some stress, remain a concern in the UK private debt market and this has led to a rise in loan defaults.

Hermes Investment Management, the £33.6 billion manager, has today added to its global fixed income product offering with the launch of the Hermes Unconstrained Credit Fund. The UCITS Fund, seeded by cornerstone investors including Quilter Multi-Asset, has investor commitments of £185m and aims to offer a high-conviction, multi-sector credit solution that is structured to perform throughout market cycles. The investment process combines top-down allocation across the global liquid-credit spectrum with bottom-up, high-conviction security selection. This is complemented by an options overlay to manage risks within the prevailing market environment. Andrew Jackson, Head of Fixed Income, and Fraser Lundie, Co-Head of Credit and Lead Credit Portfolio Manager, will manage the Fund and look to exploit opportunities throughout the global liquid credit spectrum in investment-grade and high-yield bonds, loans, credit-default swaps, asset-backed securities and other credit derivatives. Through assessing credit risk appetite across liquid-credit markets, the Multi-Asset Credit Investment Committee will provide allocation guidance, with bottom-up credit selection, implemented following intensive fundamental credit analysis that includes pricing in ESG risks. The options overlay will hedge high-conviction positions by mitigating the impact of any broad-based material deterioration in credit markets.

Hermes Investment Management, the £33.0 billion manager, has today announced the expansion of its Fixed Income team with two new hires in London. The appointments are representative of the firm’s approach to providing current and prospective clients with access to all areas of global credit markets. The Fixed Income team is now 26-strong, providing solutions across both public and private debt markets. Stephane Michel has been appointed as Senior Portfolio Manager as of 19th March 2018. Reporting to Andrew Jackson, Head of Fixed Income, Stephane will be using his breadth of experience to assist Andrew in the build out of both the Asset Based Lending platform as well as the wider Multi-Asset Credit (MAC) capabilities for Hermes. He will be responsible for identifying market opportunities, trends and strong risk-adjusted relative value across illiquid markets as well as making portfolio composition recommendations.

At the eye of the storm during the financial crisis, debt markets have more recently been broadly characterised by one factor; a chronic lack of yield. A historically unprecedented campaign of quantitative easing by the central banks pushed debt prices up and yields lower, even as suppressed interest rates eliminated the value of cash, according to Andrew Jackson, Head of Fixed Income at Hermes Investment Management. Although prices should in theory fall as quantitative easing is slowly reversed over the next months and years, that process will be painfully slow and so is unlikely to relieve the pressure any time soon.