Marketing communication – For professional investors only

Investors in short-term credit seek to avoid volatility in the value of their investments, but also seek to maximize yield. Are these two objectives compatible?

Investors in short-term credit seek to avoid volatility in the value of their investments, but also seek to maximize yield. Are these two objectives compatible? Short answer: yes. It is possible to secure yield that is substantially better than that available in money markets, while keeping volatility and capital risk to a minimum. To do this, individual credit selection is critical, as is awareness of the changing characteristics of credit markets. Credit quality can be further boosted through the integration of ESG factors.

Ultra Short Credit: Like Money Markets, but With a Twist

Institutional clients often need to park cash for the short to medium term, either to meet liabilities falling due in the next six to twelve months, or to wait for better investment opportunities.

Money markets may not be suitable for this purpose – while they offer capital protection (in all but the most extreme circumstances), their ultra short-term horizons and strict regulatory requirements may limit yield. In addition, money market managers must be able to respond to large redemption requests at short notice and this makes them, understandably, very conservative.

Investors in short-dated credit markets seek to generate extra yield through a variety of approaches.

«Our ultra short approach replicates the maturity and interest-rate sensitivity guidelines of money market funds, but is less conservative in a number of ways. We aim to generate stable yield enhancement over time,» says Emmanuel Schatz, senior portfolio manager at Ostrum AM, an affiliate of Natixis Investment Managers. 

As in money markets, Ostrum AM restricts maturities to a maximum of two years and the average maturity of the portfolio is less than one year. With bonds being very short-term and held until maturity, the portfolio benefits from the pull-to-par effect which tends to limit price volatility.

Another way to control volatility is by hedging to overnight rates. Just as money markets ensure a minimum exposure to interest rate risks, so ultra short credit keeps interest rates risk very low by indexing at least half of its assets to overnight rates. If need be, indexing can rise to as much as 100 percent of net assets to insulate the portfolio against interest rate variations.

The main difference is that the portfolio management team is free to invest across the full credit spectrum (as long as the issue has a maturity of less than two years). It can invest in investment grade, high yield and non-rated corporate bonds, and in other instruments, including commercial paper and so-called «pure rate» convertible bonds.

Beyond Credit Ratings

However, the main source of value creation is in the selection of issuers and issues.

The portfolio manager seeks to build a conviction-based portfolio of companies with resilient business models. This requires considerable research resources. With 23 credit research analysts, including sustainable bond analysts, Ostrum AM has one of the largest credit teams in Europe, and has worldwide coverage of more than 1,200 issuers.

The focus is on finding higher-yielding issuers that offer greater security than their credit ratings would suggest. «We generally don’t buy the highest-rated corporate bonds,» says Schatz. «They are often great companies, but the yield may be low so we can’t generate the returns that investors expect with ultra short credit.»

At the other extreme, Ostrum AM eschews companies with speculative future profit and cashflow profiles. «This is not like a credit fund where you try to beat an index,» says Schatz. «We target a zero-default policy, so we seek only robust companies.»

The crux of the Ostrum AM approach is based on a perception that mainstream credit ratings are focused excessively on financials, so do not necessarily reflect the overall picture of a given credit. The challenge for ratings agencies is they need to provide comparability between issues, and this forces them to compare only objective measures, such as commonly used ratios.

Schatz says: «In my opinion, ratings from agencies often do not provide enough information to assess the intrinsic quality of the business and its specific dynamics.»

  • Click here to find out more about Ostrum’s approach

Written in February 2024.

Additional Notes
Marketing Communication. For professional investors only. Past performance is not indicative of future results. All investments involve risk, including the risk of capital loss. The provision of this material and/or reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of services. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of the portfolio manager(s) as of the date indicated. These, as well as the portfolio holdings and characteristics shown, are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material. In Switzerland: This material is provided by Natixis Investment Managers, Switzerland Sàrl, Rue du Vieux Collège 10, 1204 Geneva, Switzerland or its representative office in Zurich, Schweizergasse 6, 8001 Zürich.  

NATIXIS INVESTMENT MANAGERS Paris 453 952 681 Capital : 178 251 690 € 43, avenue Pierre Mendès-France, 75013 Paris www.im.natixis.com

OSTRUM ASSET MANAGEMENT - An affiliate of Natixis Investment Managers.French Public Limited liability company with board of Directors. Share capital €50 938 997. Regulated by the Autorité des Marchés Financiers (AMF) under no. GP 18000014. RCS Paris n° 525 192 753. 43 avenue Pierre Mendès France 75013 Paris, France. www.ostrum.com