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When our team is on the road, the most common question is “where are the risks building in this cycle?” Much has been written about the explosive growth in leveraged loans, as well as rising corporate leverage coupled with the lack of covenants (i.e. covenant-lite loans) that are supposed to protect investors’ claim value. In our view, while loosening lending standards are concerning, they are unlikely to create a systemic risk.
We believe the key risk instead lies in products that invest in less liquid assets that are leveraged and/or packaged into vehicles that offer either monthly or quarterly liquidity; hence, a “liquidity illusion”.
When our team is on the road, the most common question is “where are the risks building in this cycle?” Much has been written about the explosive growth in leveraged loans, as well as rising corporate leverage coupled with the lack of covenants (i.e. covenant-lite loans) that are supposed to protect investors’ claim value. In our view, while loosening lending standards are concerning, they are unlikely to create a systemic risk.
We believe the key risk instead lies in products that invest in less liquid assets that are leveraged and/or packaged into vehicles that offer either monthly or quarterly liquidity; hence, a “liquidity illusion”.
Disclaimer
The views expressed are those of the portfolio manager as of January 2019, are subject to change, and may differ from the views of other portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice.
Should investors buy because prices are lower or sell because the economy may be slowing? Giorgio Caputo, JOHCM Global Income Builder Fund, provides his view.
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