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CONTRIBUTORS

Glenn Voyles, CFA

Corporate Credit Portfolio Manager
Franklin Templeton
United States

Jon Belk, CFA

Corporate Credit Portfolio Manager/Research Analyst
Franklin Templeton
United States

Key Takeaways

  • We believe there are compelling reasons why high-yield (HY) investors should consider moving up in credit quality amid recent spread compression. When the market is not paying investors much to assume risk, investors should take proportionally less risk.
  • Credit quality can be measured in numerous qualitative and quantitative ways, only one of which is the ratings agency categorization. Independent assessment by active managers can improve portfolio quality.
  • In the current environment where spreads are closing in on post-COVID-19 lows, we believe the potential benefits of increasing exposure to higher-quality credits within a ratings category and across ratings tiers outweigh the reasonable spread give-up. We also believe skilled active HY managers are well positioned to help investors make this evaluation.

 

Read the full paper to learn more about:

  • Why consider moving up the credit quality curve?
  • How is credit quality typically measured?
  • BB and B rated credits experiencing tighter spreads
  • Are CCC rated credits more reasonably valued?
  • Crossover investing – An alternative way to enhance quality
  • Up in quality, no matter how it is measured

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. 

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value.

Equity securities are subject to price fluctuation and possible loss of principal.

Active management does not ensure gains or protect against market declines.

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. All investments involve risks, including possible loss of principal. There is no guarantee that a strategy will meet its objective. Performance may also be affected by currency fluctuations. Reduced liquidity may have a negative impact on the price of the assets. Currency fluctuations may affect the value of overseas investments. Where a strategy invests in emerging markets, the risks can be greater than in developed markets. Where a strategy invests in derivative instruments, this entails specific risks that may increase the risk profile of the strategy. Where a strategy invests in a specific sector or geographical area, the returns may be more volatile than a more diversified strategy.

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