Underestimating Risk Is at the Heart of the ‘Missing Credit Premium’

Newfound Research is posing a profound question: Are investors notoriously poor predictors who consistently underestimate risk? The Boston firm issued a research note April 3 titled, “The Curious Case of the Missing Credit Premium.” In the note, Corey Hoffstein, the firm’s chief investment officer, and portfolio manager Justin Sibears compared returns on investment grade corporate bonds versus U.S. Treasuries, and came up with the following two findings: Over the past 15 years, the investment grade corporate bonds delivered little-to-no excess returns in comparison to safer U.S. Treasuries, overturning a “fundamental tenet” in investing. Over the last 30 years, the average…