Credit tourists may feel it is time to go home
Family offices looking for yield need to be extra vigilant as the cycle turns.
There is much about the 1970s that the world is better off not revisiting – flared trousers and three-day weeks immediately spring to mind.
There is one 1970s fashion, however, that might be set to make a return whether investors like it or not – inflation.
It is back to the future for many UK wealth managers and family offices: the last time their job was all about investing in government bonds and worrying about inflation was nearly 50 years ago. As the prospect of rates rising looms, this is the first time since then that protection, rather than wealth creation, is uppermost in their clients’ minds.
How will behaviour change? Their portfolios are very different today than they were then. Gone are the huge fixed income allocations to government bonds, replaced with convertibles, short-dated high yield, leveraged loans, inflation-linked and breakeven inflation-linked exposure. The move into short-dated high yield and leveraged loans has been a direct result of the reach for yield and has been funded by reducing exposure to investment grade.
What may perhaps be of more importance is the embrace by wealth managers and family offices of private credit.