Multi Asset Credit – Risk and Rewards for Investors

17 August 2020 – Credit markets may provide an attractive option to investors during the global recovery, so CAMRADATA’s latest whitepaper asks how Multi Asset Credit (MAC) managers can tap into opportunities, and what rewards and perils are waiting in the market.

The Multi Asset Credit whitepaper includes expert insight from guests who attended a virtual roundtable hosted by CAMRADATA in July. Participants included Cairn Capital, Muzinich & Co., Royal London Asset Management, AON, Barnett Waddingham, Cambridge Associates and Cartwright.

CAMRADATA highlights that UK pension funds over the years have shifted from equities to bonds in response to accounting standards and their own maturing profile. That shift bondward has encompassed not just liability-driven investing but also increasingly a preference for private and public credit over equities in risk portfolios.

Given the extraordinary disruption to human activity globally this year, however, there are big questions about where and how pension funds, insurers and other asset owners allocate their risk budget for the next one to three years.

The consultants at the CAMRADATA roundtable were all positive on credit as “the least worst option” for the years ahead across the spectrum of return-seeking assets, including private markets and real estate.

Sean Thompson, Managing Director, CAMRADATA said, “MAC strategies aim to deliver income, and opportunities for capital growth, by investing in a diversified range of credit assets, while targeting alpha through careful securities selection from within these credit asset classes.

“MAC strategies are attractive as they enable quick movement in allocations between credit classes, while providing risk oversight that spans across the full credit portfolio, offering benefits over a ‘siloed’ approach that results when using different managers for each credit asset class.

“This is an interesting time to discuss the potential offered by MAC, especially with the likelihood of ratings downgrades creating downward pressure on valuations and attractive entry points for fixed income managers. Our panel considered how well equipped MAC managers are to tap into opportunities created across credit sectors, including what research and execution skills are needed to deliver success.”

Key discussion points included should MACs be a diversified suite of betas with dynamic allocation to those betas; what kind of hedging policies or constraints consultants preferred to see in MACs, followed by a big debate on duration risk.

The panel then moved on to discussing lessons learnt from the pandemic; the risks and opportunities for the months and years ahead, and closed on the question of liquidity: whether institutional investors ought to be in daily-dealt funds?

Key takeaway points were:

  • One panellist warned that credit is not as safe as some people assume, highlighting there is not only insolvency risk but also tail risks such as climate change causing havoc with underlying properties in Mortgage-Backed Securities.
  • But as a means of accessing credit markets, the panel were pretty satisfied with the performance of MACs so far this year. Plus, given the historic dispersion of returns across types of credit, MACs were attractive even to larger asset owners because of MACs ability to nimbly allocate across the spectrum.
  • When it comes to hedging polices, currency hedging is expected, except where there was exposure to local currency Emerging Markets Debt. One panellist said they didn’t expect much credit hedging but a manager could make a case for it tactically.
  • The consultants noted that pension funds typically deal with interest-rate duration risk in LDI portfolios, which are a separate function from MACs. One panellist said that in their experience MAC is used within a portfolio to generate returns rather than a tool to manage duration exposure.
  • None of the three MAC managers at the CAMRADATA roundtable pretended that they saw the pandemic crisis coming. But one said that watching the first cases unfold in Italy; he believed the bond markets were complacent in their lack of reaction to the news.
  • The panel ended by discussing liquidity. One panellist said the decision ultimately lay with the managers but another noted they had seen increasing client demand for less liquid strategies for a number of reasons – monthly-dealt funds could take more exposure to Leveraged Loans and ABSs, and from another perspective, Qualifying Investor Funds offered more flexibility than daily-dealt UCITs.
  • One adviser said that most UK pension funds run way more liquidity than they need, but added that underlying liquidity must be aligned, directly and indirectly, with the clients’ cashflow requirements.

The whitepaper also features three articles from the sponsors offering valuable additional insight. These are:

  • Cairn Capital: ‘Why investors should allocate to Multi Asset Credit (“MAC”) in a post COVID-19 world’
  • Muzinich & Co.: ‘The Continued Appeal of Multi-Asset Credit Portfolios’
  • Royal London Asset Management: ‘The Downgrade Dilemma’

To download the Multi Asset Credit whitepaper click here