BBB-rated credit has outperformed A-rated debt by 48 percent in the decade since the financial crisis, according to Fidelity International.

There has only been five years where BBBs have underperformed single-As since 1996 and none of the years was concurrent, but 2018 was one.

However, the market is vulnerable to downgrades, which means the inclusion of BBBs in a fixed-income portfolio requires a focus on securities with robust covenants, stable cash flow and solid asset backing.

Kris Atkinson, fixed income portfolio manager at Fiedlity MoneyBuilder Income explained that BBB credit’s growth has been a “source of angst and hand-wringing” among many market commentators.

“Many have questioned whether BBBs present a systemic risk and whether they have a place in a fixed-income portfolio.

“While global credit markets have doubled to $10 trillion over the last decade, BBBs have increased five-fold and now represent around 50 per cent of the total market capitalisation.

BBB-rated firms are now more levered than they were 10 years ago and the rating agency justification for this is that low interest rates and high profit margins mean the debt is affordable.

“Furthermore, the BBB cohort has become dominated by more defensive sectors such as consumer staples and healthcare, after a purge of some cyclical names during the 2014-16 commodity cycle,” which tend to be “more resilient” to the economic cycle.

Mr Atkinson continued to explain: “As we saw in 2016 with commodity names, a revision of base-case assumptions by the rating agencies can result in sector-wide credit downgrades. The list of potential catalysts for such a revision is long and includes trade wars, wage inflation, and changing consumer tastes. But they all boil down to slowing growth and mean reversion of astronomically high margins.”

“While we struggle to see how the BBB market itself will cause a turn in the global economic or credit cycle, we do recognise that it may be a source of pain when risk markets crack.

“However, you ignore BBBs at your peril,” as the yield advantage of BBBs is a tide that is hard to swim against,” he warned.    

“Mindful of risk, our focus is on businesses with stable cash flows and solid asset backing. There is a time for cyclical BBBs but late in the cycle is not it,” Mr Atkinson concluded.

However, Fundeye recently reported on the problems that investors may face if Triple B bonds lose their investment grade status.

Fidelity International is responsible for £75.9 billion in assets under administration.