“We have run into a small inflation problem on account of the high level of leaf availability.”
--Douglas Adams, Restaurant at the End of the Universe
What does financial credit have to do with leaves? With apologies to Douglas Adams, in volume two of his very successful Hitchhiker’s Guide to the Galaxy, when their spaceship crash lands on a largely uninhabited planet, the survivors of Golgafrincham Ark Fleet Ship B* decide to adopt the leaf as legal tender with unsurprising consequences due to its abundance. We are regularly told financial credit is niche but the facts would suggest the opposite, it is very much leaf-like.
Financial credit: more a giant sequoia than a bonsai tree
ICE BofA Index data shows the asset class is over $4.5trn in size with 6,000+ constituents. For comparison, only the government bond markets of the US, China and Japan are larger. While it is smaller than the ‘Magnificent Seven’, it is larger than both the UK and French equity markets which have market capitalisations of $3trn and $3.6trn respectively, and is likely larger than the increasingly popular Japanese stock market which ‘only’ has a market cap of $3.4trn or $4.6trn depending on which index one uses.
Unsurprisingly, it is incredibly well diversified with the largest issuer, Bank of America, representing only 4.4% of the sector. The largest single issue representing 0.13% of the index is a $5.5bn bond issued by Goldman Sachs with a coupon of 6.75% which matures in 2037. Around 62% of bonds are issued in US dollars, with the balance in euros, Australian dollars, Canadian dollars, sterling, Swiss francs and Japanese yen. Duration, which averages around 4.5 years, is shorter than that for government bonds which are around seven years on average.
Source: ICE January 2024. Additional Tier 1 (AT1) and Restricted Tier 1 (RT1) are the most subordinated securities issued by banks and insurance companies respectively and rank junior to Tier 2 securities.
Niche it is not but it is a complicated sector to analyse, made more complex by the changes brought in after the global financial crisis to make it more resilient. That has provided an abundance of opportunities historically to find idiosyncratic bonds that offer attractive returns in combination with those issued by well-known, well-capitalised national champions and we see no reason for that to change.
*The leaders of Golgafincham hatched a plan to rid their planet of society’s most useless, using a legend of impending doom and the need to build three arks to facilitate the evacuation. In Ark A they planned to put all the high achievers, the scientists and leaders; in Ark C all the workers that build and make things; everyone else went into Ark B. Ark B was loaded and launched first, preprogrammed to crash-land on another largely uninhabited planet. While unknown to those in Ark B, Arks A and C were never launched.
Nick joined Polar Capital following the acquisition of HIM Capital in September 2010, and is co-manager of Polar Capital Global Financial Trust and lead manager of the Polar Capital Financial Credit Fund. He has 29 years’ investment experience across a wide range of asset classes but since 2003 has focused on global financials.
Before joining HIM Capital, Nick worked at New Star Asset Management. While there, he managed the New Star Financial Opportunities Fund, a high-income financials fund investing in the equity and fixed-income securities of European financials companies. Previous to that, he worked at Exeter Asset Management and Capel-Cure Myers.
