Fixed Income  

Banking and insurance firm debt attractive, says Sanlam's Doherty

Banking and insurance firm debt attractive, says Sanlam's Doherty

Banking and insurance firm debt is looking attractive in light of the pandemic, the head of fixed income at Sanlam Investments has said.

Peter Doherty told FTAdviser: “The banks have had a huge increase in regulatory capital requirements post-GFC [global financial crisis], and they’ve weathered [the pandemic] very well, they [built] a lot of reserves and now they’re writing those back.”

He added bank rates going up would be good for them as net interest margin goes up even more on the yield curve.

“So, ironically, having had their really tough moments in the GFC, we still like banking and insurance company paper, and particularly subordinated paper.”

He said there were some alternatives to investing in these assets, but buyers would have to compromise by giving up some liquidity.

“[You could] go to private credit, or traditional high yield - the way I’ve always said to think about the subordinated financial spaces is that it’s like traditional high yield but without the default," he said.

"You get a similar gross return, and then you end up with a higher net return.”

He added investors and their advisers should be thinking about the lowest risk they could take in order to beat inflation after fees.

He said this used to be gilts, but investors should now look at the two- to four-year credit market.

“That’s really where you should put your rainy day money," he said.

“[Investors should look for] a business with a cash flow that is leveraged but they’ve got a good asset base.

“Or you look at subordinated financials and by that I mean household names such as Bupa, Utmost and Aviva.”

In July, a senior portfolio manager at institutional asset manager Dimensional said there is still an important place for fixed income investments in investors’ portfolios, but investors would be forgiven for asking why in the current low interest-rate environment.

Interest rates have sat at historic lows since the 2008 financial crisis.

However, last Sunday (October 17) the Bank of England governor Andrew Bailey told bankers the central bank will “have to act” on inflation, in another signal that the bank is seriously considering raising interest rates.