Fixed Income

Fool’s Gold: Mining for “True” Value in the US Commercial Real Estate Debt Market

Distinguishing between income oriented investments with a safer risk profile and investments which offer yield, but have highly binary potential outcomes, is crucial in today’s lower yielding environment.

10/23/2017

Michelle Russell-Dowe

Michelle Russell-Dowe

Head of Securitized, US Fixed Income

Jeffrey Williams, CFA

Jeffrey Williams, CFA

Fund Manager

Distinguishing between income oriented investments with a safer risk profile and investments which offer yield, but have highly binary potential outcomes, is crucial in today’s lower yielding environment. The concept of proper compensation for risk should have been the primary lesson learned post global financial crisis. But after nearly 10 years, the market has lost its memory and many investors are now combing through riskier securities in a search for yield. In many cases, we believe investors will end up with “fool’s gold”.

“Fool’s gold” was the nick-name given to a common mineral that was often mistaken for gold. During the California Gold Rush, pyrite dashed the dreams of thousands of prospectors. While pyrite has a color and a metallic luster in common with gold, the similarity in characteristics, and in value, ends there. Pyrite has tricked countless prospectors into thinking they’d found something valuable when they had not.

With central banks having flooded the market with liquidity, compensation for risk has declined. There is little compensation for volatility, which is low, for term risk, and compensation for credit risk has declined substantially. 

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.