The ABC of MAC: how multi-asset credit strategies can offer dynamic performance across the economic cycle
In today's uncertain market environment, we believe a multi-asset credit (MAC) strategy has the potential to provide institutional investors with a dynamic solution for their income needs.
Key takeaways
- A multi-asset credit (MAC) strategy can invest opportunistically across multiple credit sectors and instruments.
- We believe a MAC strategy has the potential to provide investors a dynamic solution for their income needs and requirements for portfolio growth across the economic cycle.
- By taking an ABC approach, flexible but disciplined MAC managers can be fundamentally selective when seeking income, access higher-yielding asset classes, and pivot allocations to capture changes in relative value and market dislocation.
After a long period of unprecedented quantitative easing and a sudden central bank rate policy reversal in the United States and Europe, investment performance in credit markets appears to be stabilising. Once again, a credit allocation is proving its worth to investors, providing high income.
The macro and microeconomic outcomes of the recent period of U.S. and European quantitative tightening remain uncertain, exaggerated by dispersion in geographic macroeconomics, sector-specific challenges, and ongoing geopolitical uncertainty. In this environment, we believe a MAC strategy has the potential to provide investors a dynamic solution for their income needs.
What is MAC?
MAC is an established credit-based strategy that allows investors to mitigate environments of uncertainty and capture income-driven investment opportunities regardless of the macroeconomic backdrop. With the freedom to invest opportunistically across multiple credit sectors and instruments, we believe that MAC will continue to be a core allocation to investor portfolios and can provide solutions for both cash flow needs and portfolio growth.
Investment in a MAC strategy isn’t about timing an economic cycle or market event, but rather a MAC allocation should be seen as a strategic long-term solution to meet liabilities by providing balanced risk-adjusted returns and liquidity. With that strategic approach, we believe it’s essential for investors to work with managers who exhibit investment process discipline. At the core of this should be fundamental bottom-up asset selection complemented by thoughtful asset allocation. As a credit manager who has been managing MAC strategies for nearly 12 years, to us, MAC investing is as simple as ABC:
Accessing income
Best geography, asset class, and sector
Capital preservation
Accessing income
In a world where we’re bombarded by often conflicting economic data and geopolitical issues, it’s important not to lose sight of the primary job of a MAC manager: accessing consistent, repeatable income for investors. Having a broad investment universe (of potentially trillions of dollars) enables MAC managers to find high-quality, risk-adjusted income investments rather than being limited to one single asset class within credit markets. The sheer size of the credit asset classes combined allows MAC managers to be more fundamentally selective when seeking income, not buying a market or tracking an index, but still maintaining the integrity of a diverse portfolio, which is vital for credit investments.
A typical MAC universe
Today, consistent, repeatable income for investors is currently available across a broad range of credit markets.
Average and current levels of yield across a typical MAC investment tool kit
In fact, investors in MAC can access higher-yielding asset classes in alternative credit markets over traditional fixed income, as long as the risk/reward dynamic is suitable to meet liabilities. Owing to higher European and U.S. interest rates, investors can now reasonably expect more income from their MAC investments compared to historical averages.
Best geography, asset class, and sector
Another potential benefit of a MAC allocation is its diverse and benchmark-agnostic investment approach, with the flexibility to rotate between what is considered by the manager to be the best geography, asset class, and sector. In pursuit of the best risk-adjusted returns for investors, MAC managers can often select higher-income asset classes with a lower risk profile.
Best geography
Annualised returns of the typical MAC indexes since August 2013
When seeking the optimum risk-adjusted returns:
- Investors in MAC have achieved higher returns allocating to asset classes in alternative credit markets, as they have been paid income in excess of the relative fundamental risks.
- Investors in MAC have achieved higher returns allocating to European credit markets, as they have been paid an income premium to invest in Europe over U.S. markets. This is consistent across a variety of credit asset classes, including investment-grade bonds, high-yield bonds, and secured loans.
Of course, geographic relative value can shift, and a MAC strategy must have the conviction (based on resources and skill set) to pivot. Economic cycles, political changes, market sentiment, and global events can all affect regional credit markets differently. Therefore, flexibility and responsiveness are essential for optimizing risk-adjusted returns.
One such example is the shift in relative value between European and U.S. secured loans. For the majority of the last decade, European loans have offered higher income. However, in late 2015 to mid-2017, the United States offered a better return profile, before European loans began outperforming again in 2018. A MAC manager has the flexibility to rotate between geographies and sectors to seek the best returns regardless of market conditions.
Geographic relative value: how European and U.S. loan markets have shifted over time
Best asset class
Different technicals, sentiment, and fundamentals can all affect the asset classes in credit, the result of which is different income profiles. A MAC investment strategy can provide asset managers the chance to exploit higher income through asset allocation, sometimes even taking less risk. We observe that BB collateralised loan obligation (CLO) liabilities consistently offered a spread (income) premium over global high-yield bonds (a risk-equivalent asset). In fact, sometimes even investment-grade BBB CLO liabilities offered a spread (income) premium over global high-yield bonds. Therefore, in recent history, MAC strategies have been able to make higher income for investors and take less fundamental risk via asset allocation decision-making (i.e., allocating to BBB CLO liabilities over high-yield bonds).
CLO spreads versus global high yield
Best sector
Often a sector in credit markets can experience a macro-led dislocation, presenting a clear opportunity for a MAC strategy to reallocate capital. An example of this was the European financials sector during COVID-19 and subsequently the forced sale of Credit Suisse to UBS. In both circumstances, herd investment mentality resulted in material asset class underperformance for a short period of time. Those MAC strategies with a long-term fundamental outlook were able to invest more in European financials following these dislocations, leading to higher returns for those investors.
Asset class relative value: EU financials allocation
Capital preservation
Accessing higher income can result in larger allocations to asset classes that exhibit higher default risk than traditional investment-grade investments. However, a successful MAC approach hinges on an investment process that seeks to protect investor capital and avoid the erosion of income from credit losses. By comparing the different default rates of various bond indexes, we can see the value that can be added through fundamental credit selection facilitated by a MAC strategy. This is consistent with their ability to deliver high-income returns for lower levels of risk.
Avoiding defaults through fundamental research (%)
A dynamic solution for credit investors
We believe investors seeking a predictable, attractive risk-adjusted return profile driven by high income should consider a long-term strategic allocation to MAC. A MAC strategy—which allows managers to exploit opportunities across a variety of asset classes, geographies, and sectors alongside disciplined fundamental credit analysis—may result in better risk-adjusted returns compared to more passive index-tracking strategies in credit and traditional fixed income. We believe the strategy should be seen as dynamic solution for clients’ income and growth requirements.
Investing Index Descriptions where relevant: It is not possible to invest directly in an index. US Loans = S&P/LSTA Leveraged Loan Index (LLI) covers the US market back to 1997 and currently calculates on a daily basis. EU Loans = S&P European Leveraged Loan Index (ELLI) covers the European market back to 2003 and currently calculates on a weekly basis. US HY = ICE BofAML US High Yield Index (H0A0) tracks the performance of US dollar-denominated below investment grade corporate debt publicly issued in the US domestic market. EU HY = ICE BofAML European Currency Fixed & Floating Rate Non-Financial High Yield Constrained Index (H9PC) contains all non-financial securities in ICE BofAML European Currency Fixed & Floating Rate High Yield Index but caps issuer exposure at 3%. EU Financials = ICE BofA Contingent Capital Index (COCO) tracks the performance of investment grade and below investment grade contingent capital debt publicly issued in the major domestic and eurobond markets. EU IG = ICE BofAML Euro Corporate Index (ER00) tracks the performance of EUR denominated investment grade corporate debt publicly issued in the eurobond or Euro member domestic markets. US IG = ICE BofAML US Corporate Index (C0A0) tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market. ICE BofAML Developed Markets High Yield Index (HYDM) is a subset of ICE BofAML Global High Yield Index (HW00) including all securities with a country of risk that is a member of the FX G10, all Western European countries, and territories of the U. S. and Western European countries. The FX G10 includes all Euro members, the US, Japan, the UK, Canada, Australia, New Zealand, Switzerland, Norway and Sweden. US CLO BB = J.P. Morgan Collateralised Loan Obligation (CLOIE) BB Post-Crisis Index is comprised of solely USD denominated cash, arbitrage floating-rate collateralized loan obligations (CLOs) backed by broadly syndicated leveraged loans. CLOs that do not fit these criteria, such as Middle-Market CLOs, ABS CDOs, Emerging Market CLOs, Balance Sheet CLOs, and Infrastructure CLOs are ineligible for inclusion. Revolvers, delayed draw, equity combo, fixed rate, X tranches and step-up tranches are excluded.
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