By Peter Martin
The global credit environment has changed substantially over the past decade or so. ‘Low hanging’ credit, ripe for the taking, seems to be in short supply these days and it is has been an increasing challenge to find meaningful investment return amongst the plain vanilla.
Thus we find ourselves in a paradigm of low yields, modest returns and investors increasingly looking beyond traditional sterling investment grade credit (and gilts) to meet their fixed income needs and achieve the meaningful, risk adjusted credit returns required.
The time is right to consider utilising a more holistic outcome oriented approach within the credit pantheon, recognising that no one credit type will generate the best return at all points of the cycle.
Markets are dynamic. Everything has a season, but seasons come and go and it is important to know when to sow and when to reap in order to achieve the desired risk-adjusted return both across and within markets. Tactical and judicious switching between the credit classes in a skilful manner with careful management of risk should enable investors to harvest the best returns over time.
Multi-asset credit (MAC) is simply a philosophy; an outcome oriented approach whereby the world of credit can be accessed in an ‘unconstrained’ manner but in a (relatively) low governance solution.
The MAC philosophy encompasses:
– The use of a fuller, more diverse credit opportunity set.
– The requirement to be nimble, skilful and take advantage of credit market opportunities and pockets of value as they arise.
– The need to future proof the portfolio in light of changing market conditions and risk.
The opportunity set in MAC generally consists of the broadest possible universe of high yield, emerging market debt, loans, ABS, investment grade, and structured credit (note: this list is not exhaustive), which is blended to achieve the desired level of risk adjusted return.
This broad opportunity set enables MAC to be more diverse and invest in the most attractive debt within the company capital structure.
Having more tools in the armoury enables MAC to reflect the wider economic environment i.e. be more defensive in terms of economic downturn (e.g. invest in investment grade) and benefit when taking risk in sectors, such as high yield, is rewarded. It also allows investors to reap the opportunities of the emerging markets, when appropriate.
It is this blending of the sacred (top down macro market view) combined with the equally important secular (stock picking) across the credit asset classes, which is so fundamentally attractive.
MAC is certainly not a homogenous universe and there are many different shades of product.
We have taken the view that the most expedient classification of these different and evolving approaches to the broad MAC strategies is by consideration of their long term performance target over cash, whilst also considering any secondary focus on capital protection or volatility reduction.
We thus categorise MAC into four broad categories of defensive, balanced, balanced plus and aggressive.
It is also worthwhile noting that MAC products generally have quite modest duration, say four years in the case of ‘balanced’ MAC; duration being an indication of the sensitivity to changes in interest rates. In contrast, more traditional investment grade sterling credit benchmarks, in wide use by pension funds, have more material duration of seven years or more. This lower duration feature may be an attractive feature of MAC in a rising yield environment and make them more ‘defensive’.
Summary
– Multi-asset credit (MAC) is an approach to investing which seeks to offer an attractive risk-adjusted return to investors by diversifying the allocation to bonds between the various sectors within the credit universe.
– MAC can enable the savvy investor to take advantage of credit market opportunities when they arise using the complete array of credit available and, importantly, to do so in a low governance and cost effective manner.
– MAC can therefore help generate meaningful, risk-adjusted, credit returns that work your assets harder and smarter.
– MAC is mainstream. It is no fashion or fad.
– MAC is here to stay.
Peter Martin is head of manager research at JLT Employee Benefits
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