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Sector fundamentals have to be put in perspective to valuation. The relative value approach is a common method for sector rotation strategies. It supplements the fundamental analysis of the sectors and improves the decision to overweight or underweight specific sectors. In a first step the aggregate spread levels of sector indices are compared with their respective spread volatilities. Typically the spread volatilities (annualised standard deviation of daily spread changes) will increase with an increasing spread level of the different sectors. This procedure allows to identify sectors whose risk-return profile relative to the whole market is attractive (overweight) or unattractive (underweight). This approach can also be applied on the company level but a lesser weight should be assigned to the results for lower rated credits which require an in-depth credit analysis in the first place.

The occurrence of event risks is almost unpredictable hence they are hard to quantify. Most of the event risks can be associated with the creation of shareholder value. This can be share buyback programs, an aggressive acquisition strategy, or isolated, risky projects which change the capital structure of a company in favor of shareholders. A wealth transfer takes place from bondholders to shareholders of a company. This kind of event risk can be reduced by regular meetings with management. Unfortunately many event risks are out of control for management and sometimes the effects are not isolated for a specific company but have an effect on the entire industry. In the past good examples can be found for various industries.

Many capital goods companies are facing asbestos claims which weigh heavily on their financial profiles. Especially in a market phase with increased risk aversion these topics are brought up and heighten the negative sentiment of market participants against sectors with increased asbestos liabilities. The telecommunications sector faces new challenges through wireless technologies. European state regulators set license fees for wireless spectrum which reached billions. This changed the financial profile of the incumbent telecommunications companies. The utilities sector goes through a liberalization process accompanied by increasingly riskier business models. The tobacco sector is always a litigation target and the healthcare and pharma sectors face a lot of regulatory risks.