The booming credit market has been one of the best beta trades for investors in the six years since the financial crisis. However, the ultra-loose monetary policy supporting this trend now appears to be turning.
That’s the view of Norman Milner, a manager of the newly-launched Neuberger Berman Global Credit Long/Short Fund.
“While credit quality in general remains historically robust among developed market corporate bond issuers, default rates are forecast to rise and higher interest rates could have an impact on flows in the market,” Milner says. “In an environment of tight spreads and even tighter liquidity, increased volatility in credit markets would not be surprising going forward. This means investors may now need to be more creative to control their risk.”
In a more uncertain landscape for credit, this creativity and flexibility is crucial. A long/short approach free to take directional and relative value positions not only comes into its own as a way to control risk, but can also exploit opportunities offered up during periods of volatility.
The Neuberger Berman Global Credit Long/Short Fund is managed by Milner, alongside Rick Dowdle, Darren Carter and Itai Baron. The managers, who have worked together for nine years and have an average of 18 years of experience, joined Neuberger Berman following the purchase of Orchard Square Partners last year. The team is also supported by an additional seven professionals.
The managers of the Neuberger Berman Global Credit Long/Short strategy apply rigorous bottom-up credit analysis in an effort to achieve equity-like returns from securities higher up in the capital structure. The team only invests in large-cap liquid credits – with no structured credit, distressed or private debt. They also employ systemic hedges to protect capital as the portfolio re-positions.
Macro views are incorporated into the portfolio, but no macro bets are taken. Milner believes it is important to employ a top-down framework alongside the bottom-up fundamental research. “We do not invest outright in macro trends, but macroeconomic factors do have an impact on the companies and securities in which we do invest,” Milner says. “For example, in recent times we have witnessed a number of developing themes – such as central bank policy divergence, the global sell-off in commodities, and the increasing role of regulation.”
While the managers are reluctant to make a prediction on the precise timing of a Federal Reserve rate hike, the portfolio is positioned to profit from policy tightening.
“We still believe both credit spread and interest rate curves are too flat to compensate long-dated risk, and we have designed capital structure arbitrage and relative value trades to profit most with rising rates,” Milner adds.
“We will attempt to take advantage of the sell-off in commodity-related names by taking prudent risk in strong companies whose collateral we understand well. We will also look to build positions in emerging markets, where we see abundant opportunity. Our overall long position will be offset by a short position in defensive sectors, such as healthcare and gaming, which we believe have become too expensive.
“We anticipate better performance from this portfolio in a steady-growth, rising-rate environment than we would experience in a stalling-growth, falling interest-rate environment. We will have to adapt to a new liquidity environment that will continue to be both a great challenge and consequently a great opportunity.”
Launched on 24 June 2015, the Neuberger Berman Global Credit Long/Short Fund is a sub-fund of the Irish-Domiciled UCITS fund umbrella, Neuberger Berman Investment Funds plc. It is registered in the UK and will shortly be registered for sale across Europe.
