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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.