In terms of what specifically to invest in and, crucially, where to avoid investing next year within fixed income, plenty of options remain, even if most agree government bonds are off the table for the time being.
“I think the merits of senior secured floating rate assets, often wrapped in listed form due to their illiquidity, are underappreciated and can form a solid base for more opportunistic managers,” says Prior.
“One should also not forget the more vanilla strategies that just pick solid credit, of which there aren’t many about any more.”
Prior warns against one particular option, however. She says: “While I don’t predict the default rate to do anything spectacular in 2017, the correlation to equity of high yield makes this a less attractive area in a diversified product, in my opinion.”
For Smith, country selection will be key in 2017: “We continue to like credit, particularly in the UK and Europe where it still offers value. Current pricing implies a default rate close to 5% when the actual default rate has rarely breached 4% historically.”
From a fixed-income fund manager’s point of view, it would be understandable if they begin 2017 with a sense of trepidation, given that in most cases they cannot go outside the asset class with the fund’s money, bar leaving it in cash.
That is not to say managers are all short of ideas on how to profit this year.
