Investment decisions in volatile markets require a strategic approach to balancing liquidity and risk. The ability to capitalize on volatility hinges on identifying better entry points for investments, particularly in converts and credit opportunities, rather than equities during sell-offs. While convertibles can offer initial opportunities, their performance may not align with investor criteria amid other market risks such as upcoming rate decisions and elections. Maintaining liquidity is crucial, as cash has regained value in the current market, allowing for investment in short-duration, investment-grade instruments to enhance yield. Implementing a barbell strategy by reallocating funds from less liquid assets, such as leverage loans, into liquid cash and CLOs aids in mitigating risk while being positioned to seize market opportunities. This requires a flexible portfolio management approach that can adapt quickly in response to market movements.
This week, the Fed cut benchmark rates by 50 basis points. Lower financing costs should be a relief for companies that need to borrow in the form of bonds or loans. But, the weird thing about the previous few years of high rates and high inflation is how much corporate credit has defied expectations. While defaults increased slightly, there wasn’t a huge wave of bankruptcies. And most companies haven’t really had trouble finding financing, with a smorgasbord of options available to them — including from the booming private credit market. So what happens now that the Fed is lowering rates? In this episode, we speak with Danielle Poli, co-portfolio manager of Oaktree’s Diversified Income Fund and a founding member of the firm’s investment committee, about how she sees the next leg of the credit cycle unfolding, and how she decides between a multitude of potential investments in the space.
Related Links:
The Black Hole of Private Credit That’s Swallowing the Economy
The Hottest Way for Banks to Get Risk Off Their Balance Sheets
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