Multi-Asset Credit (MAC) is a growth fixed income strategy that we believe is capable of generating similar returns to a traditional high yield bond strategy with lower levels of volatility. MAC strategies typically invest in a mix of high yield bonds, bank loans and securitized credit (such as mortgage and asset backed securities), with some strategies also investing in emerging market debt, distressed debt and convertibles. MAC portfolios are generally managed in an opportunistic and unconstrained manner, with little or no reference to traditional credit indices, thereby mitigating some of the drawbacks associated with benchmark driven investing. Furthermore, MAC strategies are predominantly sub-investment grade in nature, and will typically only invest in investment grade bonds on an opportunistic basis, where a complexity premium exists, and/or to aid liquidity and dampen volatility. MAC strategies are generally long biased, but they may use hedging and shorting to try and reduce the volatility of returns.
For many wealth managers MAC strategies are an effective way of accessing a broad range of higher yielding segments of credit markets within a single fund. They offer potential advantage of seeking returns using both top-down asset class rotation and bottom-up security selection techniques.
The key takeaway is that asset class flexibility helps enable managers to access what we believe to be the best risk-adjusted returns in any given credit market at any given time. Even when all credit sectors are moving in the same direction, the dispersion of returns can be significant and MAC managers can exploit this with asset allocation.
In certain market environments, two aspects of MAC strategies are particularly relevant for wealth managers looking to protect their clients’ wealth. First, when prevailing credit spreads are tight, a potential advantage of MAC is that managers are not tied to a benchmark. They have the freedom to invest in their “best return” ideas while also having the flexibility to reduce risk to spread widening via asset allocation, or indeed by introducing some hedges into the portfolio. Second, by the nature of the credit asset classes involved, a MAC strategy is likely to have limited interest rate sensitivity. This is because high yield is by definition a shorter duration asset class than investment grade, and loans and securitised issuance have floating rate coupons that reset when interest rates rise. For wealth managers concerned about rising interest rates, this may be an attractive feature, although the lack of duration would add little benefit in a deflationary/recession environment.
MAC portfolios typically have cash plus return objectives that reflect market conditions over a full market cycle. Some strategies are more defensive in nature, with lower exposure to credit markets, and therefore should have reduced drawdowns in a stressed environment. Others may have a higher market exposure or a greater focus on riskier or more illiquid sectors. These strategies have higher return expectations and higher risk, but the diversified nature of the strategy should reduce the risk of being overexposed to any one individual credit asset class. So, although at one level the “MAC concept” is quite straight-forward, in practice the universe of MAC strategies is quite heterogeneous, and, accordingly, wealth managers have a diverse range of strategies available to them.
We see this in our research on managers and in the different types of managers we have rated; for example, a number of MAC managers are specialist credit houses and their strategies can focus on “deep credit” analysis that looks to exploit inefficiencies that can emerge from issuers in the lower rated areas of the market. This can include issuers that are under credit pressure when some form of restructuring may be underway, and these specialist credit managers can often take an active involvement in such situations. Other MAC managers provide a strategy that can be quite broad in terms of the range of asset classes covered. These strategies will often utilize more formal, top-down asset allocation procedures. Many of the managers with such strategies tend to come from larger established investment houses. Another grouping of MAC managers can be those managers that include emerging market debt (EMD) in their portfolios, and this often (though not always) reflects the simple factor of whether the manager has a strong EMD team and franchise. From the viewpoints of the clients, the importance of an EMD allocation or other often, more esoteric assets depends on whether they already have a similar exposure in their portfolio and whether they wish to use the MAC strategy as a means of building up more diversity in the credit portion of their overall portfolio.
A wealth manager considering an allocation should be mindful of the type of strategy, vehicle structure, liquidity profile and SFDR fund rating. This is because usually MAC strategies which allocate to loans will not be daily dealing and, in addition, some MAC funds are not setup with a UCITS compliant fund structure. If daily dealing is an absolute requirement, the investment manager needs to be comfortable and acknowledge the full experience of the MAC asset class will not be achieved. In terms of MAC strategy, as already discussed, this can range from a conservative MAC strategy which focuses on managing drawdowns, is strong on ESG and has no extended credit segments, all the way to a more concentrated, risk-on strategy which might aims to deliver alpha either through aggressive beta rotation or perhaps by taking concentrated, higher risk, bottom-up credit positions. MAC strategies which are SFDR rated article 8 and above are far and few between and may not therefore be compatible with a sustainable investment portfolio which has strict SFDR criteria.
Mercer’s research coverage of MAC managers has formed a substantial part of our research focus since 2013, and MAC has been an area of high activity with our clients. Many clients have used MAC strategies as part of a de-risking process through which they aim to reduce portfolio reliance on equities while maintaining a decent level of overall return. From a portfolio construction viewpoint, the lower volatility of non-investment grade asset classes compared with equities is a distinct potential advantage, and hence return expectations from MAC strategies are often attractive on a risk-adjusted basis compared with equities. Alternatively, many clients have used MAC strategies as a way of re-risking (or increasing the return from) their fixed income portfolios. Either way, owing to the unconstrained and flexible nature of MAC strategies, the asset class is capable of evolving with markets and is considered to have evergreen appeal.
In research terms, Mercer has a large number of rated MAC strategies of which many carry an ‘investible’ Mercer rating of A or B+. [MK1] The heterogeneous nature of these strategies means that we are very mindful of ensuring that a diversity of approaches exists within our investible universe. Thus, when looking at particular client investment requirements, we are able to match the various investment goals of the client (in terms of risk or target return or asset mix, etc.) with appropriate managers and strategies.
For the avoidance of doubt, this is not formal investment advice to allow any party to transact. Additional advice will be required in advance of entering into any contract. The findings and and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed. Past performance does not guarantee future results.
Steven Keshishoghli, CFA
Senior Researcher - Wealth Management UK & Europe
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