BOV As­set Man­age­ment and MASS col­lab­o­rate to in­crease greater fi­nan­cial lit­er­acy

The Malta Independent on Sunday - - BUSINESS & FINANCE -

At a re­cent meet­ing held by the Malta As­so­ci­a­tion of Small Share­hold­ers (MASS), two rep­re­sen­ta­tives from BOV As­set Man­age­ment Lim­ited de­liv­ered a pre­sen­ta­tion about the dif­fer­ences be­tween in­vest­ment grade and sub in­vest­ment grade bonds.

Founded in 2011, MASS is a vol­un­tary or­gan­i­sa­tion with its main ob­jec­tive be­ing to in­crease fi­nan­cial lit­er­acy among lo­cal re­tail in­vestors, by ac­quir­ing suf­fi­cient knowl­edge that can help them make in­formed de­ci­sions when in­vest­ing.

Mark Agius, Ex­ec­u­tive Head at BOV As­set Man­age­ment Lim­ited ad­dressed par­tic­i­pants ex­plain­ing that “BOV As­set Man­age­ment Lim­ited is com­mit­ted to de­liver a num­ber of be­spoke ed­u­ca­tional pre­sen­ta­tions aimed at in­creas­ing the level of knowl­edge about fi­nan­cial in­stru­ments both lo­cally and in­ter­na­tion­ally.”

Dur­ing the first part of the pre­sen­ta­tion Rachel Meilak, In­vest­ment Spe­cial­ist at BOV As­set Man­age­ment Lim­ited, spoke about the clas­si­fi­ca­tion of the bonds’ uni­verse by is­suer, ma­tu­rity, cur­rency, type of coupon, re­gion and credit rat­ing. Ms Meilak said, “It is of ut­most im­por­tance to un­der­stand the use of credit rat­ings to dis­tin­guish be­tween in­vest­ment grade bonds (good qual­ity bonds), and high yield bonds (lower qual­ity bonds).” She ex­plained fur­ther the role of rat­ing agen­cies like Stan­dards and Poor, Moody’s and Fitch, which is to as­sess the credit risk, hence the prob­a­bil­ity of de­fault and to as­sess the abil­ity of the is­suer to pay in­ter­est and cap­i­tal on ma­tu­rity.

Ms Meilak said, “Credit rat­ing agen­cies first an­a­lyse the credit risk as­so­ci­ated with the bond is­suers. In or­der to do this, they an­a­lyse the in­dus­try and com­pany, as­sess the value of as­sets on the bal­ance sheet, any covenants in­cluded in the prospec­tus and the com­pany’s strat­egy and track record, amongst other vari­ables.” She also ex­plained that an in­vestor needs to un­der­stand the lim­i­ta­tions of credit rat­ings agen­cies, such as the fact that rat­ings nor­mally lag the mar­ket’s pric­ing of risk, which is not eas­ily cap­tured. In­vestors must be con­scious that there is al­ways an el­e­ment of judg­ment. Over time, the bond is­suer’s credit rat­ing might be up­graded but also down­graded.

In the se­cond part of the pre­sen­ta­tion, Mal­colm Ab­dilla Castillo, Se­nior Port­fo­lio Man­ager at BOV As­set Man­age­ment Lim­ited gave a de­tailed over­view of the com­po­si­tion of bond yields as a com­po­nent of the risk-free rate and a spread – the ad­di­tional re­turn for the higher credit risk, lack of liq­uid­ity or dif­fer­ent ma­tu­rity. Mr Ab- dilla Castillo said: “All in­vestors should un­der­stand how changes in the eco­nomic con­di­tions, fi­nan­cial mar­kets and gen­eral mar­ket de­mand and sup­ply im­pact the yield spreads. A wider yield spread means lower bond prices and a higher com­pen­sa­tion for risk.” He then went on to ex­plain about the ad­di­tional re­turn earned be­tween in­vest­ment grade and high yield bonds to com­pen­sate for the higher credit risk.

He also spoke about the im­por­tance of un­der­stand­ing in­ter­est rate risk, through the bond’s du­ra­tion, which mea­sures the ex­tent to which the bond value changes be­cause of changes in in­ter­est rates lev­els. He ex­plained that, “du­ra­tion risk is higher for bonds with a lower coupon and a longer ma­tu­rity date”.

Mr Ab­dilla Castillo said that from past per­for­mance we can learn that high yield­ing bonds tend to out­per­form in­vest­ment grade bonds when the econ­omy is ex­pe­ri­enc­ing a re­cov­ery and vice versa. Be­fore con­clud­ing his in­ter­ven­tion, he ex­plained the dif­fer­ence be­tween in­vest­ing in di­rect bonds which carry a fixed rate of re­turn and spe­cific credit risks as op­posed to in­vest­ing in a man­aged fund with a vari­able re­turn but a di­ver­si­fied credit risk. He said that with the lat­ter, “the in­vest­ment man­ager can ad­just the ex­po­sure to in­vest­ment grade and non-in­vest­ment grade de­pend­ing on ex­pec­ta­tions of changes in eco­nomic con­di­tions and yields, in or­der to achieve at­trac­tive risk ad­justed re­turns”.

Af­ter the pre­sen­ta­tion, those present for the meet­ing had the chance to ask ques­tions about the sub­ject in ques­tion. Mr Agius said this pre­sen­ta­tion was one of a se­ries, and other pre­sen­ta­tions are planned for the com­ing months.

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