Teiki Benveniste

Investing in global credit strategies can offer investors attractive go-forward returns as interest rates level off and the default environment is proving better than anticipated, according to leading global alternative investment manager, Ares Management Corporation (“Ares”).

Head of Ares Wealth Management Solutions in Australia, Teiki Benveniste, said investors should look past the negative headlines, with credit markets providing opportunities for investors.

“After three years of tumultuous market conditions, with traditional fixed income suffering historical losses and volatility alongside credit markets facing wider spreads and rising defaults, we are seeing increased pockets of opportunities in credit markets,” said Mr. Benveniste.

“We believe income-oriented solutions constructed around senior, higher quality segments of the corporate debt and alternative credit markets are able to hit the ‘sweet spot’ of credit, delivering higher yields and minimising volatility.”

Ares’ demonstrated experience actively managing global credit assets has been supported by the performance of the Ares Global Credit Income Fund (‘AGCIF’ ‘the Fund’), which recently surpassed its three-year track record.

The strategy was launched with the goal of delivering higher yield, diversification, and downside protection to investors. With a core holding in senior and secured, floating rate credit, the Fund has been significantly less sensitive to rising interest rates.

Against the backdrop of a rapidly changing and volatile market environment, the Fund has outperformed traditional fixed income markets, returning 9.7% for the last twelve months ended 30 September 2023 and 5.1% p.a. since its inception on 1 May 2020.1

“Low yields and long duration have driven low and volatile returns in traditional fixed income strategies amid concerns around inflation, recession and geopolitical conflict,” said Mr. Benveniste. “The track record of AGCIF demonstrates the benefit of an alternative income-oriented solution that offers a defensive source of yield for investors.”

“The combination of higher yields, cheaper asset prices and wider spreads in an environment where bouts of volatility have become shorter and more frequent can present meaningful alpha-generating opportunities.

“As the era of low sovereign rates across the globe comes to an end, we believe flexible investment solutions anchored in floating rate credit should benefit from the go-forward market environment and should serve as the new ballast within investor portfolios.”

Actively managing tail risks

While the current entry point looks attractive, Ares recognises that increased tail risks need to be closely monitored. Slower growth and higher rates will likely drive increased ratings downgrades and, to a lesser extent, defaults, leading to heightened volatility and dispersion.

Loan defaults continue to rise off historical lows, but Ares believes default rates will not spike and should remain manageable over the next 12 months. Credit selection comes to the fore in this environment, and despite an increase in defaults across credit markets, AGCIF has experienced a 0% default rate since inception.

“Active credit selection will be a key driver in returns in an environment where default rates in credit are expected to revert to the historical mean,” said Mr. Benveniste. “However, and importantly, we do not expect [the worst case scenario] to materialise.

“In this rapidly evolving market, nimble and active portfolio management will remain key to capitalising on intermittent bouts of volatility, as the attractive entry points this environment can create are usually only short-lived,” said Mr. Benveniste.

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To support the joint venture, the two companies have formed Ares Australia Management (“AAM”), which will act as the investment manager for new investment vehicles specifically structured for investors in Australia and New Zealand.

AAM will be well positioned to benefit from the long-term trends and structural advantages driving increased demand for alternative investment products in the Australian market, including the significant and growing superannuation system in the country and the under allocation to global fixed income assets in investor portfolios. AAM combines Ares’ robust suite of proven investment strategies with Fidante’s broad retail and institutional investor distribution, local fund reporting and back office administration.

“As the Australian population continues to focus on growing and diversifying retirement assets in the country’s superannuation system, the corresponding increased demand for alternative investments with more stable income has created a tremendous opportunity for alternative asset managers,” said David Sachs, Partner of Ares. “We are pleased to enter into this strategic joint venture with Fidante, which will utilize its significant distribution expertise to meet the growing demand for higher returning investment products.”

Challenger Funds Management Chief Executive Nick Hamilton said, “Fidante’s strategy includes providing its customers with excellent funds management solutions and today’s announcement is a great example of how Fidante works to bring exceptional fund managers with high quality products to the Australian market. Ares is a leading alternative investment manager with global scale and a strong track record of delivering attractive returns for its investors. Fidante’s joint venture with Ares will provide local investors access to additional investment expertise in credit, which will play an important role in delivering high quality diversified returns for investor portfolios. We look forward to launching a range of investment strategies in collaboration with Ares and help build Ares Australia Management into a successful specialist asset manager.”

AAM will be governed by a Board of Directors consisting of representatives from Ares and Fidante and will be headquartered in Sydney, Australia. Ares’ Managing Director and Relationship Manager based in Australia, Bill Entwistle, will continue as a senior member of the Ares and Fidante relationship management effort in Australia.

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