United Kingdom, Intermediaries

Credit dispersion continues: Q&A

Portfolio Manager Ryan Valente offers his insights on today’s dispersion-driven credit opportunities, changes since the COVID-19 pandemic and the value of managing alternatives credit at Wellington.

Views expressed are those of the author and are subject to change. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional or institutional investors only.

In this short Q&A, alternatives credit investor Ryan Valente profiles the ongoing dispersion-driven opportunities he sees in credit markets, shares the biggest shift in his investment thinking since the COVID-19 pandemic, and highlights the benefits of managing alternatives credit at Wellington.

What is your main investment focus?

I develop and manage nonbenchmark-oriented US and European credit strategies, including long/short fixed income, for investment-grade and high-yield markets.

What is a current research idea you’re excited about?

In my view, there is no shortage of opportunities in today’s credit markets. Despite the headline stories around tightening spreads — fueled in large part by the US Federal Reserve’s (Fed’s) and the European Central Bank’s (ECB’s) corporate-bond-buying programs — I believe there are numerous potential ways to make money in credit without an ongoing beta tailwind.

Economic volatility remains elevated and a weakening economic data pulse can be seen around the world. This is probably most acute in the United States, which has been heavily impacted by the resurgence in coronavirus cases. Today’s environment impacts the pricing of credit risk, where companies most tied to a prolonged economic recovery (e.g., retail, travel, energy) are getting hit the hardest. Notably, defaults have picked up and higher-quality credits are outperforming lower-quality, which I think doesn’t bode well for a sustained recovery in credit. In an environment like this, we expect to see widening disparity across credit markets — and that is exactly what is playing out.

Figure 1 shows an example of today’s significant credit market dispersion, which we believe creates interesting opportunities in fundamental long/short, in relative-value trades in cash/CDS basis and capital structure situations, and in tactical trading using liquid index securities.

FIGURE 1

Dispersion in US high yield

What has been the biggest shift in your investment thinking since the COVID-19 pandemic?

The biggest change for me has come from recognizing how quickly credit markets have priced in both the pandemic-driven economic collapse and the economic recovery. Though we now know that the Fed and ECB have had a central role in the market recovery, the pace and degree of these moves has been unlike anything I have ever seen. I believe this means investors at the epicenter of central banks’ focus (corporate credit) cannot fight the technical factors driving the direction of spreads.

However, I think the current macroeconomic backdrop is much more fragile than past events like the 4Q18 liquidity crisis. I believe this will drive volatility and dispersion that will, in turn, differentiate between winners and losers, creating many fundamental and relative-value investment opportunities. 

What differentiates Wellington’s approach to alternatives?

I’ve traded credit on some well-known platforms, and I believe Wellington’s culture, collaboration, and focus on investment excellence are differentiated from how most hedge funds operate today. But what has been perhaps most impactful for my process is the scale and infrastructure supporting our alternatives investment platform.

The firm’s credit and macro research, dedicated traders across credit markets, and robust operational functions — like our dedicated Treasury Team that directly faces our prime brokers — are all invaluable resources in the management of my credit book. I tap into these resources frequently to make my job more seamless and to allow me to concentrate on risks and opportunities. I think this is a valuable and underappreciated attribute of a large-scale alternatives firm like Wellington, particularly in credit markets.


For more of our thinking on dislocation-driven opportunities in alternatives credit, read our recent white paper and digital short.

Please refer to the investment risks page for information about each of the following risks:

  • Below investment grade risks
  • Capital risk
  • Credit risk
  • Risks of derivative instruments
  • Manager risk

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