Trade Finance has seen growing appeal as an investment strategy as investors seek refuge from large bouts of market volatility and sell-offs in global fixed income markets.
Trade Finance strategies that demonstrated resiliency since 2020 have cultivated a more varied investor base than had been known to be allocating to this asset class in the past. The growing presence of institutional asset managers in this area of private markets is another strong indicator that investor interest has significantly ramped up thanks to the compelling attributes of the asset class.
Trade Finance offers a compelling, defensive fixed income strategy to navigate today’s markets.
So what has made Trade Finance a more popular investment strategy, and is it still relevant in today’s environment of rate rises, high inflation, and where recessionary risks are mounting?
Many investors like the ultra-short duration profile of Trade Finance, with underlying assets typically averaging around 90 days. Compared to Investment Grade or High Yield fixed income benchmarks, where average duration will be over four years and which have witnessed sell offs of around 9% YTD**, Trade Finance strategies can offer a comparable credit spread with significantly less duration risk.
The ultra-low volatility exhibited by a well-managed Trade Finance strategy also resonates with investors looking for a reliable source of diversification and downside protection. Market swings in bond and equity markets do not have a major effect on the short-dated corporate operating payment claims that constitute trade finance portfolios. Trade Finance strategies can therefore see annualised volatility at a fraction of that exhibited by public fixed income strategies.
Investors also gravitate toward the complexity premium that can be realised from Trade Finance strategies. The asset class is operationally intensive and has numerous barriers to entry. A persistent gap of the supply of trade finance in the market is one reason why trade finance assets often benchmark favourably vs public CDS and bond spreads for the same issuer, prior to considering the significantly lower duration.
Trade Finance investors can therefore be justified in a sanguine outlook in a continually changing market environment, as the asset class has the right ingredients to offer a stable and defensive fixed income investment strategy in all market contexts.
*Monthly average of VIX index in excess of 20, indicating abnormally high volatility, in 19 of 27th months (70%) since February 2020, compared to only 14 of 108 for the prior 9 years (13%). Past performance does not predict future results.
**Bloomberg Global Aggregate Index returned -9.0% YTD with an average maturity of 9 yrs. ICE BofA Global HY Index returned -9.8% YTD with average duration of 4.2 years Figures as of April 29th 2022. Past performance does not predict future results.
Trade finance investments are designed for professional investors only and may be illiquid in nature.
Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Past performance does not predict future returns. If the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor’s local currency. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. The data used is derived from various sources and assumed to be correct and reliable at the time of publication. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. The Summary of Investor Rights is available in English, French, German, Italian and Spanish at https://regulatory.allianzgi.com/en/investors-rights. The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted, except for the case of explicit permission by Allianz Global Investors GmbH.
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