In the low-interest-rate environment and especially in crisis times, a globally diversified corporate bond portfolio can offer euro investors a significant yield premium – even after hedging costs. But the wider investment universe not only increases the opportunities for asset managers. The requirements for research and risk management are also increasing. In this article, I would like to shed light on the challenges associated with a global investment strategy and how these can be met with platforms’ help.
Even before the Corona crisis, the low-interest-rate environment was a key issue in the euro corporate bond market. The subdued growth and inflation development and the resulting sustained loose monetary policy of the European Central Bank resulted in extremely low-interest rates.
And despite all the current fluctuations in the capital markets: The Corona crisis will ensure that the low-interest-rate environment continues to solidify internationally. The following applies to monetary policy now more than ever: interest rates must remain low, and bond purchase programs must be maintained in order to stabilize the price level and thus the economy in the coming deep recession.
Investments outside the euro area are worthwhile
That is why the following still applies to invest in corporate bonds: It is worth looking beyond the eurozone. This is because bonds from outside the common currency area can deliver additional income even after hedging costs. After all, the corporate bond market does not price all securities efficiently at all times. For example, a US dollar bond issued by a German issuer can offer a higher yield premium than a comparable euro bond. This difference can also be collected if the risk of an unfavorable change in the exchange rate is eliminated through appropriate forward transactions. In this context, the current developments in the capital markets make internationalization even a little more attractive. After the US Federal Reserve cut its key interest rates significantly, the interest rate differential between the two sides of the Atlantic has shrunk considerably. This also reduces the cost of currency hedging.
The challenges of a global investment universe
However, the investment universe’s globalization also means that the investment process is becoming significantly more complicated. With around 12,000 potentially investable bonds, the opportunities are enormous, but the analysis requirements also increase enormously. Because a wide variety of factors determines the prices on the corporate bond market. New issues, sustainability indicators, ratings, broker portfolios, and quant models are just a few that, ideally, you have to keep a constant eye on every bond. The number of data points is in the millions. To steer this flood of data in an orderly way and make it usable, modern technologies of knowledge networking are required, which can be efficiently integrated into the investment process.
Complexity reduction through platform solution
In order to keep an eye on the complex data, Union Investment has developed the so-called Global Credit Platform, with the help of which, for example, a relative value comparison between securities from the same issuer or within a defined group can be carried out efficiently and quickly. The software automates and systematizes internal research and thus increases the efficiency of the flow of information, for example, for new issues. By combining market data, internal research recommendations, broker positioning, and internal quantitative models, the platform also enables new investment ideas. And finally, the development also helps with risk management, for example, to keep an eye on individual securities liquidity. IT does not replace the portfolio manager. On the contrary: it ensures that they can concentrate on their core area, namely security selection, investment decisions, and portfolio management. And that is precisely what matters much more than before in the internationalization of the portfolio.
I would be interested in how you master the challenges of low-interest rates and what you think of the corresponding platforms as we use them?