Has your budget kept pace with the growing expense of your everyday needs? Are inflation, rising interest rates and market instability making you anxious? You’re not alone—Everything is more expensive and increasing interest rates and economic uncertainty add additional complexity for investors and pension fund trustees. In the March/April issue of Plans & Trusts Karen Kerr, vice president and institutional portfolio manager at PH&N Institutional and Jeff Roberts, an institutional portfolio manager at PH&N Institutional looked at the growing popularity of multi-asset credit (MAC) investment solutions.
What Is Multi-Asset Credit?
MAC is an investment strategy that focuses on building portfolios of diversified credit assets – that is, fixed income securities that carry credit and liquidity risk and therefore offer higher yields than safe-haven government bonds. These securities may include investment and noninvestment grade corporate bonds or government bond issues in emerging countries.
MAC strategies offer a way to build broad and flexible portfolios of diversified global credit assets, Kerr and Roberts explain. These strategies offer higher yields due to their focus on credit assets versus traditional core fixed income and carry higher credit and liquidity risk as a result.
The broad and flexible nature of MAC strategies means that one such strategy can look very different from another. There are no definitive guidelines as to which credit strategies are generally included within MAC portfolios; as a result, underlying asset classes targeted, underlying characteristics and investment objectives can vary greatly. This makes comparing the strategies and monitoring for successful implementation more challenging.
There are numerous reasons pension fund investors may consider using a MAC strategy within their investment portfolio. In the article, Kerr and Roberts offered their perspectives on the benefits of using MAC strategies in an environment of uncertain interest rates and economic ambiguity.
Capitalizing on the Global Credit Cycle
MAC strategies invest across the global credit universe, and investment managers have a high level of flexibility to allocate heavily to those areas of the market that appear most attractive at any given time. That means investment managers can invest to take advantage of regional differences in the economic cycle and also invest in assets with the most attractive valuations.
“This is where MAC strategies can shine, since their flexible mandates allow them to quickly shift allocations in a way that more restrictive strategies cannot,” the authors write.
Yields and Interest Rate Sensitivity
For investors who feel that their fixed income investments do not provide adequate levels of income or yield, MAC strategies may offer an attractive option due to the higher yielding nature of the assets in which they invest.
Another key advantage of MAC strategies: Because they generally invest in lower duration credit assets and often can hedge interest rate risk tactically, MAC strategies tend to be less sensitive to rising interest rates than more traditional “core” fixed income strategies with exposure to government bonds. There is, however, a trade-off: Higher yielding, lower duration credit assets carry higher levels of credit risk than government bonds, which are considered a safe-haven asset in times of market volatility. Investors concerned about rising interest rates can view an investment in MAC as offsetting interest rate risk through greater credit risk.
Risk Management
MAC strategies provide an ability to carefully manage risk and to be defensively positioned in times of elevated market uncertainty. This is especially prominent in less constrained MAC strategies that could reduce their allocations in certain asset classes to zero. Investment managers will manage how much overall credit risk, interest rate risk, liquidity risk and currency risk—amongst others—is present within the portfolio and will dial exposures up or down based on their macroeconomic views MAC managers will also closely monitor and manage the risk levels within each asset class to ensure that they are providing the desired attributes to the overall portfolio.
While the advantages of MAC strategies are many, the authors write that they may not be appropriate for all investors.
Important considerations include:
MAC strategies don’t generally invest in safe-haven government bonds, and such investments may be important to some investors for downside protection.
Governance may be more complex. Often MAC strategies are “less constrained” in nature and may be more difficult for the end investor to assess. Effectively assessing a MAC strategy usually requires a reasonable level of experience and expertise in fixed income markets, which is often why MAC investors use their relationships with trusted investment managers or investment consultants to help assess the strategy.
Funds need investment managers with the right experience and skills. The broad nature of the universe in which MAC operates and the extra flexibility that investment managers have also come with extra responsibility. Managers and their teams need the skills to choose the right securities and to understand how those individual security decisions affect the overall makeup of the MAC portfolio.
“MAC strategies offer a unique and dynamic way to invest in global credit. The flexibility and diversification that these strategies provide can be a very effective addition to an investment portfolio regardless of whether an investor is experienced in global credit or not,” Kerr and Robert write.
Tim Hennessy
Editor at the International Foundation
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