Investment grade credit: A portfolio Swiss army knife

Dispersion is on the rise, market noise has returned, and geopolitics is a key source of risk. For active global credit managers, that creates a far more compelling market backdrop and reinforces why investment grade credit remains one of the most versatile tools in portfolios today.

We spoke to portfolio managers Matthew Jackson (MJ) and Michael Booth (MB) about why this year may offer better opportunities, how AI is reshaping the investment grade landscape, and where they are seeking outperformance.

Michael, you joined Robeco last year, what were your first impressions?

MB: “The first point I’d say is Robeco is very well known in the global investment grade space. It’s a well-regarded team with a strong long-term track record. Secondly, I have observed a very thorough and structured credit research process that feeds into the broader global investment grade process and supports things like single name selection.”

“I have also noticed very good cross collaboration. When we talk about AI and technology, we’ve had fruitful discussions between fixed income and equity teams. At the Credit Quarterly Outlook in December, AI was a big focus and we drew on the expertise of our equity colleagues who presented. That dialogue has continued – they’ve joined quite a few of our single name credit committees and provided insights. That doesn’t happen at every global asset manager. There are a lot of very smart and experienced individuals in the company, and it’s good that we can draw on that, whether it be equity, fixed income or quant solutions.”

What would you say about the current market environment for investment grade credit?

MJ: “We’ve gone from the second half of last year, which was almost a painfully subdued and boring environment for investment grade markets – spreads very tight, little dispersion or volatility in sectors or individual names – to something quite different this year. This has happened for a number of reasons. The AI theme is front and center. Last year was dominated by discussions about hyperscaler issuance to fund capex and its impact on investment grade markets. This year, the focus has shifted to AI’s impact across sectors – positive or negative – and its broader macro implications for employment, growth and inflation.”

“We’re also seeing more noise around private credit, much of it linked to AI. The asset class has significant exposure to the software sector and is closely tied to insurance companies, which are major holders of private credit.”

“And now we have Iran.”

MB: “Over the past 18 months, spreads have reached very tight levels, driven by strong technicals and robust demand for all-in yield. That dynamic may now be softening slightly.”

“Supply has so far been easily absorbed – spreads even rallied in January despite heavy new issuance. So supply itself is not causing a wobble in valuations. However, given that technicals have been the primary driver of tighter spreads, any sustained reversal could put pressure on markets from current elevated levels.”

“I think there may be more valid question marks over fundamentals going forward too. What will the longer-term impacts of current events in the Middle East be, on top of the AI and private credit uncertainty we are already seeing?”

When spreads are tight, where does an active manager add value? Where does outperformance come from?

MB: “The key levers are macro credit risk factors – regional allocation, capital structure, sectors and credit ratings. We can be overweight or underweight relative to the benchmark. Dispersion in these factors has come down. Euro versus US was a big outperformer for us last year. We were overweight euros and underweight US dollars. That worked well and we’re still running the position, but at a smaller size.”

“Single name volatility and dispersion are rising, which is positive for active management. The benchmark we use has around 17,000 bonds, so there’s constant news flow and single name opportunities. By contrast, the Robeco Global Credit strategy is concentrated – around 300 bonds. Where we have conviction, we size positions accordingly.”

“Within bonds we can also move across the curve and take advantage of event risk or covenant structures. So there’s issue selection alongside issuer selection. We’re also running good liquidity, with around 5% cash and 10% in covered bonds. That gives us flexibility to deploy capital quickly if dislocations occur.”

“Finally, as active managers we can use macro overlays and hedges. In rich markets with low volatility, we can underweight or use derivatives such as credit options to provide cheap tail risk hedges and minimize drawdowns. That toolkit is important.”

MJ: “Credit markets remain structurally less efficient than equities. The breadth and complexity of the market create persistent inefficiencies. By dedicating significant time to bottom-up research, we aim to identify mispricings at both issuer and bond level. As single name dispersion increases, the opportunity set increases.”

What does the discussion look like in the team right now about AI?

MJ: “AI is dominating the conversation. The uncertainty isn’t theoretical, it’s already driving divergence across sectors and individual issuers. We don’t know how this will play out. Some companies are still delivering solid earnings, but markets are deciding AI will hurt them in three to five years and stocks are being punished.”

“We’ve enhanced scrutiny across every name we hold, with analysts scoring every issuer on AI threat level, so we’re assessing both the risks and opportunities from AI. We don’t have exposure to names directly in the firing line, which is good. But avoiding losers doesn’t always generate much outperformance if they’re small index weights. As markets punish certain names, we’re taking a hard look at them. In some cases, AI-exposed names that have come under pressure are starting to look more interesting.”

Other sectors and themes of interest?

MB: “One interesting development is how the AI narrative has moved into private credit, particularly business development companies (BDCs) – the listed vehicles that provide financing to mid-sized companies. In the US a significant proportion of lending has been into software, and BDC bond spreads have widened meaningfully. That reflects software exposure and also concerns raised in Q4 around credit quality and some weak results. We’re still underweight and don’t own any, but we’re researching the space more closely for potential opportunities.”

“Banks remain an attractive sector, Q4 results were solid and supply is expected to be modest. We favor senior preferred and senior non-preferred over Tier 2 and AT1, which look rich. Utilities are also interesting. AI build-out requires large electricity generation and we’ve seen more issuance, including hybrids, from utilities. It’s a stable, low business risk sector, and we’re selectively adding exposure.”

MJ: “We’re seeing a move toward so called ‘HALO’ businesses – heavy assets with low obsolescence risk. Asset-light models are facing more scrutiny. Across both equities and credit, there’s a rotation toward more traditional, asset-heavy sectors. For example, we’ve increased our exposure to telecoms.”

“As Mike said, within banks, we’ve shifted away from subordinated exposures and toward senior positions in core global systemically important banks (GSIBs). Spreads in Spanish and Greek banks had compressed significantly, so we’re moving up the capital structure and focusing more on core European and US names.”

MB: “We’re also seeing more M&A activity in the US, particularly in pharma, which introduces incremental supply and event risk. Europe remains relatively quiet on that front. Buying the new debt of companies involved in large M&A transactions, with a clear deleveraging profile thereafter, often provides strong outperformance.”

Elevator pitch: who should consider investment grade credit and why?

MJ: “Investment grade should arguably always be a core part of a portfolio. It offers better yields than over the past decade. It has Swiss army knife characteristics – in risk-on environments you benefit from spread carry; in risk-off environments, embedded duration protects returns. It dampens volatility for investors holding risk assets like equities. It offers predictable cash flow. And coupons today are much better than a few years ago. Plus, it’s a liquid asset class.”

MB: “Yes, let’s not forget liquidity. Investment grade credit is a deep and liquid asset class relative to most others. Advances in tools such as portfolio trading have greatly increased the ability to transact quickly and in size too.”

The men’s football world cup is this summer, if investment grade credit were a world cup team who would it be?

MB: “I’d say an Italian team of the 1990s. Strong defense as the bedrock – like the all-in yield component. Then a couple of flair players up front who score goals – like single name alpha picks.”

MJ: “I’d say Germany – not always the most exciting, but consistent, turns up and gets the job done. And maybe a bit of England – out of favor for so long, but now the stars may finally be aligned!”