- Heightened fears of a US recession created a flight to quality in credit markets this year and profited investors including Ashish Shah, the head of corporate credit at Goldman Sachs Asset Management.
- In an exclusive interview with Business Insider, he discussed why he’s now leaning into the not-so-quality end of the credit spectrum, and shared other opportunities he sees.
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Recession anxiety has been one of the defining market themes of 2019.
The yield-curve inversion, trade war, and even the sheer record length of this expansion gave investors jitters about a downturn that has so far failed to materialize.
Investors were naturally concerned that companies with the weakest credit ratings and largest piles of debt would run into the most trouble.
Amid this anxiety, managers of the Goldman Sachs Income Builder Fund saw an opportunity to lean into corporate credit; the fund invests in a mix of credit and equities.
But it wasn’t just any debt: they were focused on companies that had demonstrated they can generate strong cash flow and pay down their debt.
“The reason that was valuable was in an environment where there isn’t fantastic growth or growth is decelerating, those bonds generate good returns,” said Ashish Shah, the head of corporate credit at Goldman Sachs Asset Management, which supervises $1.6 trillion in assets. The fund he co-manages has returned 18% and outperformed its Morningstar benchmark this year.
Another reason for the outperformance of these so-called investment grade bonds was that many companies with cash seized upon widespread recession fever to pay down more of their debt, Shah said. This behavior made them even more attractive from a quality perspective.
Shah’s team took a similar approach to quality on the equities side by hunting for companies with strong dividend yields in addition to cash flows. Microsoft, Johnson & Johnson, and Chevron are some of the top stock holdings in their portfolio.
Other investors who were wary of companies with excessive debt loads have been rewarded for their discipline this year, even near the weakest portion of the credit spectrum. CCC-rated bonds — two downgrades away from default status — are having their worst annual performance relative to their BB-rated peers on a risk-adjusted basis according to Goldman Sachs data.
Where he’s investing next
Even though recession concerns are still present, Shah is now eyeing the babies investors threw out with the bath water as they fled to quality.
“Investors — especially going into year-end — have been overly conservative and have kind of bet only on the highest-quality credit,” Shah said.
He is leaning into what he describes as the mid-quality segment of the high-yield market: companies that don’t have the best ratings but aren’t on the brink of bankruptcy either. Single-B credit is in the junk-bond universe and has cheapened this year, for example.
What these mid-quality companies tend to have in common is a track record of paying down debt, and some level of insulation to an economic downturn.
Another corner of the credit market he finds attractive is mortgages, thanks to the Fed’s balance sheet reduction.
On one hand, the Fed sapped liquidity out of money markets and contributed to the September spike in short-term rates.
But in the same process, the Fed offloaded a lot of agency mortgage-backed securities — and these are up for grabs for investors who want to diversify their portfolios away from corporate credit.
“Today I would say investment grade credit looks okay but not super-attractive” Shah said. “Mortgages, relative to their history, actually look a lot more attractive.”