The Case For Alternative Credit | Chief Investment Officer

Investors have much to gain from turning to alternative credit, argued Towers Watson in a new research paper.

In the report, the firm asserted that by investing more in alternative credit, institutions could reduce their reliance on the equity risk premium without wholly sacrificing returns.

Alternative credit—defined in the report as all credit outside of traditional investment-grade government or corporate debt—ranges from liquid high-yield bonds and bank loans to more illiquid distressed debt and specialty finance strategies.

In comparison with traditional credit, alternative strategies offer a wider variety of risk premia. By exploiting the diversification benefits of alternative credit, Towers Watson argued investors could achieve better risk-adjusted returns.

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In particular, the report noted investing in alternative credit reduces exposure to interest rate risk—an especially important consideration at a time of rate uncertainty, the firm added. From October 2010 to March 2011, the most recent period of rising interest rates, the study found that alternative credit sources largely outperformed traditional credit.

Chris Redmond, global head of credit at Towers Watson, said alternative credit has been historically accessed through hedge funds or small off-benchmark allocations within existing traditional fixed-income mandates. More recently, however, the emergence of dedicated alternative credit specialists and strategies has made it more accessible—but there is “still a long way to go,” he said.

“The opportunity remains underinvested and misunderstood by many institutional investors,” Redmond said. “Institutional investors’ investment in alternative credit so far is a drop in the enormous roughly $40 trillion global credit markets’ ocean.”

While alternative credit makes up 25% of global credit offerings, Towers Watson clients have only invested 8% of their total credit portfolios in the asset class, according to the report. Illiquid credit fared even worse, with less than 1% of client portfolios dedicated to it.

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One of the biggest asset management groups in Europe has published internal gender diversity data in its annual corporate responsibility report for the first time.

Columbia Threadneedle’s European operation made the move in an effort to “improve gender balance in the asset management industry”.

Its report shows women make up 37% of all employees in Europe. They account for 24% of the group’s business management committee, up from just 8% in December 2013.

“The asset management industry has a real opportunity to be the driving force for gender diversity.”

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Columbia Threadneedle identified a “lack of diversity disclosure” among European asset managers, adding that “disclosure is a first step towards improvement”.

“We believe that diverse companies are better governed and as a result deliver better business performance and outcomes for clients,” said Mark Burgess, CIO for Europe, the Middle East, and Africa at Columbia Threadneedle. “The analysis of company boards in this regard is part of our investment process, so providing an insight into the number of women among our senior leaders, investment managers and other employees is an obvious step.”

Burgess acknowledged that the company’s gender balance lagged other professions, and emphasized that disclosure was only “an important step towards improvement”.

“Recruitment is a critical factor and over the past two years we have introduced practices to ensure that we have both male and female representation on candidate lists, including guidelines for our recruitment partners to advance more women to the interview phase,” Burgess said. “I am pleased to see that our diversity numbers have been improving and am keen to ensure this trend continues.”

Columbia Threadneedle diversity data Source: Columbia Threadneedle InvestmentsIn a white paper on the subject of gender diversity, Chris Wagstaff, Columbia Threadneedle’s head of pensions and investment education, wrote that no asset managers rank among Europe’s top 20 financial companies for diversity disclosure. “There is clearly much to be done,” he said.

“We believe that the asset management industry has a real opportunity to be the driving force for gender diversity in financial services and should be known as an industry in which women can have a long, flexible, and prosperous career,” Wagstaff wrote. “If the perception can be made to reflect the reality, there is no reason why the current gender imbalance cannot be addressed with all of the positives associated with such a shift working to the ultimate benefit of the end investor.”