Azhar Hussain & Khuram Sharih
2017 was a volatile year for fixed income and the stormy environment provided the ideal backdrop against which to test Royal London Asset Management’s (RLAM) newly-launched Multi Asset Credit (MAC) fund. Managers Azhar Hussain (pictured) and Khuram Sharih introduce the fund and update on its composition and their approach to building a fund designed with the aim of generating consistent returns with low volatility through the credit cycle.
Different types of rain
As shown in the table below, our ‘alternative’ credit approach for MAC seeks to target attractive returns without compromising liquidity or significantly increasing volatility, as is commonly the case at the riskier end of the credit spectrum. Our fund invests in assets across the global credit universe, including loans, high yield and asset-backed securities. The fund is also not constrained by following the allocation of a particular benchmark index.
The fund was launched in July this year and targets lower volatility than traditional investment grade and high yield portfolios. This is a product of the mix of assets held and the focus on high quality security selection and volatility management. Fundamental credit selection in combination with diversification across asset classes aims to dampen volatility while increasing certainty of returns.
Our approach to investing in this area is based on two principal beliefs:
1. Credit markets are inefficient: this is something common to all credit portfolios at RLAM – basically that security is undervalued while liquidity and volatility are mispriced. Our credit research and selection looks to exploit these inefficiencies, from a bottom-up perspective.
2. Credit sub-sectors have their own cycles: a combination of top-down strategic perspective with individual security analysis creates a portfolio comprised of assets across multiple sub-sectors, strengthening the credit quality of the fund and reducing volatility and asset correlation.
Checking the weather forecast: minimising volatility
While it is important to generate returns, we do not chase yield and aim to keep volatility low. One of the tools at our disposal is the use of leveraged loans. Companies utilise loans to raise finance, for example, for mergers and acquisitions, or restructuring their debt-to-equity profile. At the moment, in an environment of low interest rates around the world, many companies are diversifying their capital structure to include loans, in addition to traditional bonds, taking advantage of low rates.
The coupons of loans are tied to an external rate and are periodically re-set, meaning that they offer protection against a rise in interest rates. They are also short duration and offer an attractive yield and better security than many other types of fixed income investment.
Against a backdrop where we expect interest rates to rise, we think that investment in leveraged loans, given the security and interest rate protection they offer, is a logical step for diversifying your portfolio and adding higher yielding assets. The fund also has exposure to global high yield debt, asset-backed securities and other secured debt. We believe that for long-term investors who need to protect capital and generate an attractive level of income, loans are an essential part of a balanced portfolio.
The all-weather solution: MAC
Our investment philosophy underpinning the MAC fund is consistent with RLAM’s overall credit investment approach, which aims to exploit inefficiencies in the market by using our expert research to uncover mispriced opportunities. In our MAC portfolio, we combine our core bottom-up fundamental stock selection process with a top-down strategic allocation view, to construct a portfolio of our best ideas.
By constructing a portfolio across the credit spectrum, our MAC fund aims to generate consistent returns with low volatility. For all long-term investors, stability is a key factor in compound returns, and we believe that our MAC strategy is well-placed to weather the storms ahead.
