Towers Watson clients allocated $21 billion to alternative credit
globally in the past five years
ARLINGTON, Va.--(BUSINESS WIRE)--Oct. 12, 2015--
Alternative credit should play a more pivotal role in institutional
investors’ portfolios to reduce reliance on the equity risk premium and
to drive investment returns, according to a research paper by global
professional services company Towers Watson (NASDAQ: TW). In the paper,
entitled Alternative
Credit: Credit for the Modern Investor, the company asserts
alternative credit has been underexploited by the majority in the past,
both in terms of asset allocation and implementation efficiency, and
should be added to investment portfolios to improve investment
efficiency and portfolio robustness.
“Investors have historically accessed alternative credit predominantly
via hedge funds or small off-benchmark allocations within existing
traditional fixed-income mandates,” said Dan Lomelino, Towers Watson’s
head of North American credit. “In recent years, dedicated alternative
credit specialists and strategies have emerged, making it more
accessible. However, there is still a long way to go, as the opportunity
remains underinvested and misunderstood by many institutional investors.”
Towers Watson defines alternative credit simply as all credit that is
not traditional investment-grade government or corporate debt. In the
liquid area, this includes high yield, bank loans, structured credit and
emerging-market debt; and in the illiquid area, it comprises asset
classes such as direct lending, distressed debt and specialty finance.
Since 2010, Towers Watson has conducted about 300 alternative credit
searches totaling almost $21 billion.
“Despite alternative credit strategies having been underexploited by
investors at large, some of our clients have recognized the key part
they can play in a portfolio’s strategic asset mix and an area where
active managers can make a big difference,” said Lomelino. “That said,
institutional investors’ investment in alternative credit so far is a
drop in the enormous $40 trillion global credit market ocean.”
According to Towers Watson, funding an allocation to alternative credit
can come from either equities or traditional credit, or both. Funding
from traditional credit has the merit of reducing the exposure to those
credit asset classes (investment-grade credit in particular) where the
asymmetry of investment returns is unattractive. Meanwhile, funding
through reduced equity allocations can help improve the balance of
portfolios by reducing the reliance on the equity risk premium. At
various points over the last year, equity has represented the favored
funding source, notably when stretched valuations, and overly optimistic
earnings growth and profit margin retention have weighed on future
risk-adjusted return prospects.
“Regardless of whether an allocation comes from equities or traditional
credit, alternative credit can play a valuable role in providing added
sources of return and improved diversity. This is particularly
attractive against a backdrop of rich valuations in the majority of
mainstream credit assets,” said Lomelino.
Towers Watson Investment
Towers Watson’s Investment business is focused on creating financial
value for institutional investors through its expertise in risk
assessment, strategic asset allocation, fiduciary management and
investment manager selection. It has over 800 associates worldwide,
assets under advisory of over $2.2 trillion and over $75 billion of
assets under management.
About Towers Watson
Towers Watson (NASDAQ: TW) is a leading global professional services
company that helps organizations improve performance through effective
people, risk and financial management. With 16,000 associates around the
world, the company offers consulting, technology and solutions in the
areas of benefits, talent management, rewards, and risk and capital
management. Learn more at towerswatson.com.
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Source: Towers Watson
Towers Watson
Josh Wozman, +1 703-258-7670
josh.wozman@towerswatson.com