Euro credit is often treated as the quiet corner of institutional portfolios – stable, low maintenance, and easy to overlook. But that assumption is under pressure. Structural biases and shifting market dynamics are making passive exposure harder to justify.
The illusion of stability
Fixed income indices are typically seen as neutral. In reality they carry structural biases. The most indebted issuers dominate index weightings, which can leave passive investors overexposed to leverage risk. Unlike equity benchmarks, credit indices rebalance monthly to reflect new issuance and rating changes. This churn creates inefficiencies that active managers can try to exploit, while passive strategies must accept them.
These issues have always existed, but today’s market dynamics make them harder to ignore.
What is changing beneath the surface
Issuer dispersion is rising. Credit quality is diverging, and the share of BBB-rated names has grown in recent years, increasing sensitivity to downgrades in late cycle conditions. The euro investment grade universe is also expanding, which adds selection complexity. Passive portfolios remain exposed to deteriorating credits until they fall out of the index, often after spreads have widened.
ESG expectations are evolving. Investors are moving beyond exclusions. They want deeper integration, proprietary analysis and engagement. Concerns about the influence of US-based ESG data providers are growing, which encourages independent views that reflect European priorities. Passive approaches find this harder to achieve.
These shifts amplify structural weaknesses that have always existed in passive credit strategies.
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Disclaimer: Investing in euro credit involves risks, including interest rate risk, credit risk (including downgrade and default risk), liquidity risk and general market risk. The value of investments may fluctuate and investors may not get back the amount originally invested. Past performance is no guarantee of future results.
Van Lanschot Kempen Investment Management NV (VLK Investment Management) is licensed as a manager of various UCITS and AIFs and authorised to provide investment services and as such is subject to supervision by the Netherlands Authority for the Financial Markets. This document is for information purposes only and provides insufficient information for an investment decision. It does not contain investment advice, investment recommendation, research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. Opinions expressed are as of the date of publication and may change without notice.
Past performance is no guarantee of future results. The value of investments may fluctuate and investors may not get back the amount originally invested.
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