With current events the main influence to the structure of the corporate portfolios these days, getting buy-in for new investments requires investment managers to educate their managements about what they’re doing. In some cases managers want to move down a notch or so to get a little more yield. Some advisors are suggesting that even BBB-rated assets, the last level before junk, be considered (see related story here).
In fact, downward rating migration continues to increase the relevance of BBB-rated issues. In 1973, BBB issues were approximately 9.5 percent of the Barclays Credit Index; this compares to over 40 percent today. This segment of the credit market cannot be overlooked. More members are convincing management to change the investment policy to include BBB issues or at least the higher-rated BBB issues.
At a spring meeting of The NeuGroup’s Treasury Investment Managers’ Peer Group 2 meeting, one member walked peers through his company’s investment policy review. The policy had not been changed since 2008 and the goal was to pick up yield and update the minimum average AA- to A+ ratings. These meant that when discussing changes with the board it was important to mention corporate names the board would be familiar with and that they would now be able to buy. The investment management team also requested allowing 144a issuers – those that public and private entities that access US capital markets without registering the offering with the Securities and Exchange Commission (SEC) – that are technically private placements and not in the Merrill index. They also requested a 10 percent maximum allocation to these issuers.
Asked what resonated the most with senior management when proposing a change, the presenting member said they cast a wide net. “We did a little of everything,” he said. “We showed that we were leaving money on the table and also where [the company] stood relative to its peers.” He also suggested an indexing approach and moving in small increments, for example, from 5 percent to 10 percent, and similar increases. The increases are not too drastic but incremental enough to the portfolio to increase diversification.
When investing in the corporate market, treasurers need to manage liquidity. Good credit research has never been more valuable. Prepare for periods of illiquidity and view them as an opportunity to find value. Also continue to increase diversification and look for value within sectors.