When thinking of credit investing, investors often associate it with risks. While investment grade credit is seen as riskier, government bonds are considered safer. High yield bonds are often associated with default risk. However, while investors should certainly weigh up the opportunities and risks, they should consider that credit offers a better risk-reward profile than corresponding equities and government bonds, as pointed out by Pictet Asset Management.

According to an assessment by Pictet, historical data suggests that credit delivers steady returns. Since 2001, European investment grade has outperformed German bunds with similar volatility, achieving a better Sharpe ratio – the balance between risk and return. Similarly, European high yield credit has provided higher returns with lower volatility than European equities, which have not adequately compensated for their higher risks, as evidenced by a poor Sharpe ratio.

“Whatever an investor’s risk tolerance, a portfolio of government debt and equity never produces the optimal portfolio when credit is also an alternative. We find that for each targeted level of risk, adding credit to an allocation produces a more optimal portfolio,” says Ermira Marika, Head of Developed Markets Credit at Pictet Asset Management.

Read the full assessment here.