The healthcare sector could provide loan-focused investors with new opportunities following the pandemic, suggests Pieter Staelens, portfolio manager of CVC Credit Partners European Opportunities Limited.
Commenting on the state of play for credit investors, he argued that that the opportunities last year to invest in loans in the travel, leisure and hospitality sector had passed. These sectors rallied last year following the announcement of the vaccine with the issuance of loans and bonds, but Mr Staelens considers it to be an increasingly small window for investors.
He said: “That trade is pretty much over now. There are still some opportunities to be done in that space, but the yield pickup is just so small versus a normal loan that it's not really worth it in the current market.”
Instead, the portfolio manager believes that healthcare can be an encouraging option for investors, due to its resiliency during the current economic climate.
Rather than considering volatile, unpredictable stocks such as oil, mining and wider commodities, where the prices remain difficult to forecast, he was positioning the trust towards credit opportunities with built-in certainty and predictability.
While there may be risks from regulatory changes or consumer behaviour changes with healthcare, he felt this was easier to model than the price of oil, which he considered to be little more than a random guess.
Mr Staelens explained: “We've got a lot of exposure to healthcare right now because we like the space and at CVC, we have an extensive institutional knowledge of the sector. Every sector has been impacted by the pandemic, but this one has probably been the least impacted and it should be resilient in the COVID world and beyond.”
CVC Credit Partners European Opportunities Limited is a Jersey-based close-ended investment company. Its shares are traded on the main market of the London Stock Exchange (LSE).
It aims to provide shareholders with security, low volatility, liquidity, and minimal correlation with equities by investing in European sub-investment grade credit. It also tries to lure in retail investors and clients not included in institutional circles.
Outlining on the company’s approach, Mr Staelens said: “We primarily invest in loans, which is an asset class that is not very accessible for non-institutional investors, such as private individuals, high net worth individuals, and private wealth managers. Generally, in Europe it's more difficult to access this asset class than it is in the US.”
Alongside his company’s pivot to healthcare, Mr Staelens offered his view on one of the key topics in an economic climate defined by quantitative easing and heavy borrowing: inflation.
He understood there are diverging views on inflation, with central banks mostly considering it to be transitory while dissenting voices consider a more permanent shift to be underway due to the amount of money these institutions are printing.
Whatever the case, loan investing could be set to benefit from this volatility.
Mr Staelens said: “In theory, loans should be an effective inflation hedge given that it's a floating rate asset class. Every three months your coupon effectively gets resets depending on where LIBOR or Euribor is set.”
Despite this opportunity, he realised a stigma still existed around loans, with people questioning them morality of investing in them following the 2008/09 sub-prime mortgage disaster in North America, and also attractiveness of investing in a sector sometimes perceived as complicated and bland compared to protest investing or growth strategies with equities. Instead, he asked people consider credit investing to look at his returns, which in the long-run, are likely more exciting than Reddit threads.
He concluded: “There are a lot of misconceptions, and a lack of understanding of how credit markets work. Our investment trust will never do things like GameStop or Tesla where you can double or triple your money in one year. That is just not how credit markets work. We are targeting an eight percent net return per year. Since inception in 2009 we have done slightly better, just above 9 percent and, to date, we have never had a negative year. It’s a lot more ‘steady as you go’, and maybe it's not sexy enough for some investors, but it has an important role to play in balanced portfolios.”