Alternative credit would allow institutional investors the ability to reduce reliance on equity risk premium and drive investment returns, according to investment advisor Towers Watson.
In a paper – Alternative credit: Credit for the modern investor – the firms says alternative credit has been underused in asset allocation and should be included in portfolios to improve investment efficiency.
Alternative credit is defined as all credit that is not traditional investment grade government or corporate debt, so includes high yield, bank loans, structured credit and emerging markets debt. Less liquid asset classes would include direct lending and distressed debt.
To fund an allocation to alternative credit, the firm suggests moving out of equities or traditional credit “or indeed a bit of both”.
“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,” says Chris Redmond, global head of credit at Towers Watson.
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