Corporate bonds offer more returns with manageable risks

Alois Seeholzer, what are your tasks as a credit portfolio manager?
As a credit portfolio manager, I invest in corporate bonds issued on the capital market. I analyse and assess them in terms of their expected returns in relation to their creditworthiness and the risk incurred. If we consider the opportunity/risk ratio to be advantageous, we buy these bonds for our funds. We monitor these companies and their development very actively in order to identify any problems at an early stage. In the event of an impending deterioration in the fundamental data, we have to consider potentially selling the bonds of affected companies.

Do you focus on companies worldwide or do you limit yourself to Europe?
We mainly track companies from the USA and Europe as well as from Asia. These are largely, but not only, listed companies. For most strategies, we buy bonds from companies with an investment grade rating. This means that the investment quality should be at least triple B minus (BBB-) and therefore solid with a very low default probability.

So are corporate bonds relatively safe investments?
Exactly. Nevertheless, even investment-grade corporate bonds carry some credit risk, as companies are also subject to cyclical factors. This risk is offset by a credit risk premium, the so-called credit spread, in addition to the underlying government bond yield. The credit spread averages between one and two percent. This is quite something as it isn’t possible to achieve this return with a Swiss, German or US government bond. The premium can of course vary over time, depending on the economic environment. It is usually somewhat higher in challenging economic situations and conversely lower if the risks in the economy recede.

To what extent is the turnaround in interest rates affecting your investment activity?
Above all, we have to consider which companies and sectors stand to benefit from and which are negatively affected by higher interest rates. The European banking sector, which in the past has only been able to make small profits due to the negative interest rate policy in the lending business and now has significantly better margins, is set to benefit. However, things have become more difficult in the real estate sector due to the rise in mortgage interest rates, and there are also uncertainties regarding the development of rents. We are accordingly reviewing whether we receive an appropriate additional premium when purchasing bonds in this segment.

How do you procure in-depth information?
Listed companies have to report their figures on a regular basis and there is usually quarterly reporting. We use external sources such as research by rating agencies or independent providers such as CreditSights, as well as official announcements such as the US Federal Reserve. In order to get the right information, it also helps to be well networked and include other opinions. The more experience we have, the better we are able to deal with the flood of information and to filter and make optimum use of it.

Is there a recipe for good performance?
There are many reasons for good performance. Cyclical aspects and monetary policy must be taken into account. We receive valuable input here from our macroeconomists. I also rely on information from my team colleagues who monitor the various sectors and companies I do not manage myself, such as energy, pharmaceuticals and the automotive industry. For my own area, the financial sector, I am in regular direct contact with banks and traders. The fact that Swiss Life is well established as a life insurer and highly valued as an institutional investor gives me good and direct access to this capital market. Personal contacts and relationships remain extremely important in the corporate bond market despite digitalisation.