Because of the home bias in the credit market, UK pension funds are not only missing out on a number of advantages that global credit provides, but also they aren’t necessarily exposed to UK-based firms.
This is according to Pilar Gomez-Bravo, London-based fixed income portfolio manager at MFS Investment Management.
Speaking to Modern Investor during the Pensions and Lifetime Savings Association's Investment conference in Edinburgh, she said there was analysis to support the claim that there was a bias in fixed income portfolios towards domestic assets.
'It happens not just in the UK but also in countries such as Australia. Traditionally, there is a big split between fixed income and equities: whereby equities are more international, fixed income has the home-country bias, partly because it is liability driven. However, now, given where the yields are, you’re forced to have the debate about this.’
Gomez-Bravo, whose previous work experience includes heading Neuberger Berman’s European credit division, says there are several key advantages that investors are missing out on because of the home bias.
First of all, there is £11 trillion of assets in the global credit universe and only slightly over £500 billion in UK sterling credit. It therefore represents only 5% of the global credit universe.
Only 44% of the issuance in sterling credit comes from the UK. However, this doesn’t mean that the issuance in sterling reflects a broad geographical representation of issuers.
‘The difference is that emerging markets are well represented in global credit universe but not in sterling credit. This is just another avenue of investment opportunity that you can’t get access to if you just invest in sterling credit,’ Gomez-Bravo says.
Also in terms of sector breakdown, global credit provides better exposure. ‘The UK credit market is more focused on regulated entities, by that I mean banks and utilities, whereas the global credit market is more exposed to industrials. This means that you have access to other sectors such as communications.’
Not exposed to UK
One of the reasons why investors would choose sterling credit over global is that they would like to have exposure to UK issuers. But the assumption that entities that issue sterling-denominated bonds are UK-based is wrong.
‘There are only 166 issuers that only issue in sterling and not issue in other currencies, as opposed to 2944 issuers in global credit. The largest issuer of sterling credit is the European Investment Bank. The second largest is KFW, a German fund. The third largest issuer is French utilities company EDF.’
Gomez-Bravo co-managed M and according to Citywire data, in the past year she was the top performer among all 43 UK funds in the Bonds - Global Corporates sector, with 21.9% return.