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Returns plus Resilience? A Closer Look at Leveraged Finance
Recent years have seen a rapid expansion in the availability of leveraged finance strategies. These multi-sector fixed income strategies blend high yield bonds together with leveraged loans and more. Although investors may be concerned about lower-quality credits during a period of economic difficulty, these strategies claim three timely advantages versus conventional high yield portfolios: diversification, lower duration and tactical flexibility.
IN THIS PAPER
How do we define leveraged finance strategies? Leveraged finance strategies are part of the diverse multi-sector fixed income family. Founded on the complementary nature of high yield bonds and leveraged loans, they represent a high-conviction approach to sub-investment grade credit.
What are their main characteristics? Although leveraged finance strategies typically take more credit risk than high yield fixed income strategies, they offer exposure to floating-rate assets and significantly less duration risk (with average duration often less than one year).
How resilient are leveraged finance strategies? Their focus on lower-quality credits might cause investors some concern in a climate of economic difficulty. Yet detailed proprietary analysis shows that these strategies can deliver both downside protection and meaningful upside capture in a variety of different environments.
Ten years ago, an investor seeking a diversified fixed income solution focused on higher-yielding strategies would have found only a handful of external managers with viable products. Today, following a period of unprecedented investor demand and market growth, we can find a plethora of hybrid, actively managed offerings that combine high yield bonds and leveraged loans in new ways.
In this paper, we use manager peer group analysis to highlight portfolio exposures, performance (including results in particular market conditions) and key differences between offerings. We also compare these strategies to peer groups of standalone high yield and leveraged loan strategies to scrutinise the benefits of combining the two asset classes in one solution.
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This commentary is for institutional investors classified as Professional Clients as per FCA handbook rules COBS 3.5R. It does not constitute investment research, a financial promotion or a recommendation of any instrument, strategy or provider. The accuracy of information obtained from third parties has not been independently verified. Opinions not guarantees: the findings and opinions expressed herein are the intellectual property of bfinance and are subject to change; they are not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets discussed. The value of investments can go down as well as up.
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