Making use of credit rating premiums to achieve higher bond yields

Bond assets are exposed to three main risks which determine their success:

• changes in exchange rates in the case of foreign investments
• changes in interest rates and in the interest rate structure
• changes in the credit rating.

In Swisscanto’s approach, the "credit spreads" risk premium is the decisive controlling quantity used to attain added value. That means that loan and credit rating risks are taken deliberately. That is because these are systematically and positively rewarded by higher yields. Given a sufficiently wide diversification, the additional yield achieved with this strategy considerably exceeds the expected default or bankruptcy risks of all the borrowers held in the portfolio. The risk pertaining to interest rates and currencies, and their components, is largely neutralised in relation to the benchmark. This is done by continuously controlling the bond assets in such a manner that they react just as sensitively to the main risks as the benchmark portfolio given as the reference quantity.

Very good borrowers (AA and higher) have relatively low risk premiums compared with government bonds. Their main risk lies in interest rate changes, which are difficult to forecast. They are therefore eliminated by us in that the terms of the investments are selected in such a way that they correspond to those of the benchmark.

In the lower rating categories, there are an increasing number of stock-specific credit rating premiums. Swisscanto creates added value for the investor by selecting borrowers who are valued worse in comparison with the reference group or their own history, but show a higher potential from a fundamental perspective.

The prerequisite for this strategy to succeed is, though, that the portfolio is professionally controlled and checked in all its dimensions. This includes an optimal selection of individual borrowers, diversification of sectors and co-ordination of terms, while taking account of limits, such as permitted deviations from the benchmark and item sizes.

Products and services

• Institutional funds
• Swisscanto Investment Foundations (de/fr)
• Mandates

Further informations

• Further publications