The market's perception of risk doesn't always match the actual risk. Finding those gaps means looking past the sector label to the business underneath.
Take consumer discretionary: apparel, retail, travel and leisure. The conventional view is that these businesses are highly cyclical. But in fitness, for example, consumers have shown more reluctance to cut their spending.
Fortress’s global co-head of corporate credit Aaron Blanchette knows that looking deeper takes more analysis, more expertise, and more time to understand what drives cash flows.
Watch to understand how looking past sector labels may reveal potential opportunity.
Aaron Blanchette:
You're constantly hearing about the changes in risks that companies and industries are facing. But sometimes the market's perception of risk doesn't match the actual risk you are taking. We like to find areas where there's a misperception of risk, where we think we can price a higher degree of risk than actually exists. Let me give you some examples of how this works in practice.
For example, the consumer discretionary industry. That includes businesses like apparel, retail, and travel and leisure. The conventional view is the consumer discretionary businesses are highly cyclical, but we believe there are often segments within this industry where the perceived risk is mispriced. Take the fitness industry, for example. We’ve found that consumers will reduce their spending in a lot of areas, but are more reluctant to change their health and wellness budget.
So if you can underwrite the investment properly, you can get paid for cyclical risks that may not exist. The key is doing the work to understand the actual business fundamentals versus the sector label that gets applied. Sometimes businesses get categorized in ways that don't reflect their true risk profile. This approach requires more analysis, more industry expertise, more time spent understanding what really drives cash flows in these businesses.
But that's where you can find opportunities that others are missing. When you're evaluating private credit strategies, ask managers how they think about sector risk. Do they just avoid complex sectors altogether, or do they look deeper to find opportunities to structure better returns with limited risk?
