Strategic role of credit in private wealth

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A positive return profile, alongside new opportunities in private credit, is prompting Asia’s wealthy individuals to invest more in fixed income.

Asia’s economic development has generated enormous wealth across the region, creating an influential community of individual investors who are increasingly looking for diversified exposure for their investments. And in today’s volatile market conditions, there are high levels of interest in the stability offered by fixed income products.

“From the mass affluent segment of the market all the way up to the ultra-high-net-worth-individuals, Asian investors are showing greater sophistication when they approach fixed income products, reflecting their evolving needs in an uncertain environment,” said Guan Sim Ng, Head of Institutional Client Group, Singapore & International Markets, HSBC.

How Asia’s wealth management industry is approaching this demand for fixed income was the subject of a recent episode of HSBC’s Global Viewpoint podcast, which featured Marcio Bogoricin, Head of Asia Wealth Management (ex-Japan), PIMCO.

He gave three reasons why investors in Asia are keen to allocate more of their wealth to credit products. The first is the income that is generated by credit, which is not predictable over the lifespan of the product, but also untaxed in many of the region’s jurisdictions.

The second reason is capital preservation, due to stable returns and relative stability, which is particularly valuable during a period of global uncertainty, market volatility, and inflation. Finally, there is the diversification that credit delivers, helping provide a balanced exposure alongside equities and other assets.

Credit’s current return profile is an important part of the story. The ultra-low-rate environment of the previous decade is now firmly in the past. Back then, investors needed exposure to high-yield debt and emerging markets to get only a small return. Nowadays, it is possible for a portfolio of high-quality debt to deliver healthy returns without including too much risk.

“What we are seeing differently to maybe five or six years ago, is that given higher yields, you can go a little bit safer. You don't have to add that much risk in the portfolio,” said Mr. Bogoricin.

In terms of assets, he highlighted US mortgage agency debt that is guaranteed implicitly or explicitly by the US government, which is currently paying better yields than some corporate bonds.

“So today, you can construct a portfolio that instead of adding a corporate bond, you can add an agency mortgage, and still maintain very high quality,” he said.

Outside the US, he said there are opportunities to take exposure to markets where central banks are cutting rates faster than the Federal Reserve. With active management, it is possible to allocate in such a way to take advantage of divergence in monetary policy, he said, pointing to recent moves made by the European Central Bank.

In addition to interest in public credit products, there is also a move among wealth management clients towards private assets – in particular, private credit. Mr. Bogoricin said that 70% of private banks already have private credit products for their clients. This reflects a significant shift in accessibility towards an asset class that was typically available to institutional investors and family offices. But as a new asset, individuals require some education to clear up some misconceptions.

“’Private credit’ is a very broad term. So, when you talk about it, a lot of people might think about corporate lending, which is just one small part of private credit,” said Mr. Bogoricin, pointing to asset-backed lending as another large segment of the market.

These asset-backed loans help overturn the misconception that private credit is more risky than public market variants. The advantage of this kind of loan is that a real asset can be acquired if the loan turns sour, in contrast to a high-yield bond, which is typically backed by the cash flows of the issuer.

Furthermore, there are some broader benefits: for example, the heterogeneous nature of private credit means that it offers diversification to a portfolio. Non-public loans can go to a wide range of borrowers, including fund financing, aircraft financing, and even loans for royalties based on intellectual property.

Nowadays, high-net-worth-individuals are investing more in private credit, and there are signs that even retail investors will be able to participate in the future. The Monetary Authority of Singapore recently proposed a regulatory framework for retail private market investment funds in the country¹, while Hong Kong is looking to broaden access to private markets for retail investors with a portfolio of at least HKD8 million².

Going forward, wealth managers will need to create private credit products that take into account the specific needs of retail investors. Liquidity is a potential concern in the retail market, due to concerns about money being locked in a private credit fund for several years. To make retail investors more comfortable with the asset class, fund structures will likely need to provide periodic access to the invested money.

“Overall, the growing interest in private credit is just another sign of the growing sophistication of Asian investors and how they are open to new investment opportunities in credit,” said Ms. Ng.