As we look ahead to 2025, the forces that drive global credit are rife with mixed signals and extreme valuations. As evidenced over the last year, an unconstrained approach to credit investing can utilise a tactical approach, which has the potential to generate alpha amid dynamic market conditions.
Fast reading
- Federated Hermes Unconstrained Credit Strategy invests across the fixed income universe and the flexibility this approach allows has been utilised throughout the year to drive performance.
- We rotated out of some subordinated financial and corporate positions and into senior exposures to reduce exposure to risk; reduced emerging market debt in favour of developed market debt; added to structured credit exposures to benefit from the attractive income potential; and shifted our global exposure in light of the US election result.
- The Strategy was also protected from the unexpected volatility spike in August by a put option which delivered positive alpha. As the market moved wider, the Strategy was able to add to risk through the credit default swap index, whilst monetising and extending the maturity of the options book.
Investors have had to contend with a lot of uncertainty in 2024, amid inflationary pressures, geopolitical turmoil, political uncertainty, debt vulnerabilities and the risk of US recession. But such testing market conditions can highlight the benefits of agile, active asset management.
Federated Hermes Unconstrained Credit Strategy invests across the fixed income universe – encompassing a range of credit products, risk-return profiles and responsibility outcomes – and the flexibility this approach allows has been utilised throughout the year to drive performance.
The active management of the long book is reflected in a various changes to the portfolio – the divergence between the price of emerging market and developed market debt, for example, prompted a reduction in the former in favour of the latter.
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