CAMRADATA, a leading provider of data and analysis for institutional investors recently released a White Paper, ‘Where lies the future of Multi Asset Credit?’ compiled following a round table event with leading asset managers and investors held in June 2017.
Keith Cornelius – Trustee of the American Express UK Pension Fund, Mette Charles – Senior Investment Research Consultant, Alistair Sutherland – Consulting Director, Investment Services Team, Ravi Cheema – Senior Associate, Investment Team, Greg Fedorenko – Vice President, Manager Research and Brendan Maton – Freelance Journalist were the participants at the round table.
The White Paper considers the opportunities offered by Multi-Asset Credit (MAC) and investigates what the future holds for this asset class, both in this current macroeconomic climate and going forwards. Three MAC asset managers, Eaton Vance Investment Managers, Franklin Templeton Investments and Investec Asset Management also provided their own views and insights, helping to illustrate the benefit that can be derived from a Multi-Asset Credit Strategies (MACS) approach.
Sean Thompson, Managing Director, CAMRADATA said, “Global economic growth remains lacklustre and the outlook for inflation highly uncertain. Also, Government bonds are losing their income generating qualities, leaving investors no choice but to look elsewhere.”
“As a result MAC strategies have become increasingly popular over the past few years because of their flexible and diversified approach that makes them attractive to investors investing in this asset class,” adds Mr Thompson.
Key findings from the White Paper
MAC strategies typically offer a higher yield, while offering defensive qualities through dynamic risk management using several different credit asset classes. The strategy seeks to provide a strong income element on a consistent basis that few other assets can provide.
Credit is now seen as the go-to asset class to keep pension funds and insurers in good health. Bundles of mortgages, car loans, High Yield and Emerging Market debt are deemed more attractive on a risk-adjusted basis than holding company shares; and more generous than safer government bonds. As Justin Bourgette, a credit portfolio manager at Eaton Vance comments in the White Paper, “Credit is going to be part of the portfolio because of the attractive risk-adjusted returns.”
It is not just market returns that have caused investors to alter their traditional allocations. The regulation of pension funds and insurers has also supported more exposure to credit.
As Jeff Boswell, Strategy Leader of Developed Market Credit at Investec, points out, “Pension funds are being forced to look for more return by hunting further along the risk spectrum.” That journey brings asset owners to the likes of high yield, leveraged loans, structured credit and private debt, with a vast spectrum of available debt and credit options.
But the variety of opportunities in debt and credit also begs the question of how pension funds and insurers allocate. Do they employ specialist managers for each niche of their liking or do they appoint managers with flexibility to invest in a range of debt markets on a dynamic basis?
Alistair Sutherland, Consulting Director at Deloitte says, “Asset owners say they have the governance to oversee discrete mandates but most don’t. Better to give the discretion to the asset manager and leave them to use the building blocks as they see fit.” Many at the round table agreed.
Assets under management in MACS have boomed over the past three years. Tom Raftery, Credit Product Manager at Franklin Templeton, added that the popularity of MACS has led to massive product proliferation. “Buyers of MACS are in a tremendous position,” noted Raftery.
Essentially every offering is unique given the range of credit sectors that fit this type of mandate, and the differences in the philosophy, expertise, and/or geographic reach of the managers creating them. “To the extent that their research resources allow, consultants, other advisors, and investors can shop the market for MACS that offer exactly what they want in terms of sector exposure, risk/reward profile, and liquidity,” adds Raftery.
Looking to the future, the challenge for MACS is establishing their territory. Plenty of pension funds and insurers are currently looking for Alternative Credit managers. Some of the funding will come from Investment Grade portfolios. MACS managers need to win the argument that they can cover the range from IG to Alternatives.
The consultants at the CAMRADATA round table said the variety of MACS meant that they could be appointed in combination to increase diversification. If large bond ETFs and long-dated bond funds get hurt in a rising rate environment, then MACS will put on assets.
However, most MACS themselves have not experienced a period of rising rates; the big question for investors is which type of strategy will better suit the times ahead, when neither businesses nor governments will be able to rely on cheap money.
Sean Thompson, Managing Director, CAMRADATA adds, “The current yield challenges facing many investors undoubtedly require a new way of thinking in terms of asset allocation. While credit has long been a core income generating component of many traditional asset allocation models, the evolution of financial markets, coupled with the complexities of investing in the current environment, have cultivated a different way of credit investing. Our White Paper is therefore, essential reading for investors looking at MAC strategies now and in the future.”