Multi-Asset Credit

The Pete Seeger song that became a hit during the 1960s in a cover version by The Byrds, “Turn! Turn! Turn! (to Everything There Is a Season),” may seem to have little relevance to the world of debt investment. But when it comes to the management of Multi-Asset Credit (MAC) portfolios, the underlying message holds true—there is a time to be in each asset class and a time to leave.

With a MAC approach, plan sponsors and other institutional investors empower managers to create portfolios that seek to achieve an attractive total return by investing in all sectors of the fixed income market. MAC managers can vary or even eliminate exposures to specific asset classes to seek to take advantage of a time to sow—when asset class valuations, dispersions, and future likely behavior are attractive—and a time to reap, when valuations may have moved to excessive levels.

The MAC approach is a shift from the philosophy of a core and satellite approach to the fixed income allocation where separate managers would be hired for discreet mandates in different asset classes. The typical MAC universe of opportunities spans a broad range of asset classes, including high yield, emerging market debt, loans, securitized debt, and investment grade corporate bonds. This can be more efficient from the plan sponsor’s perspective as it allows them to hire a single manager as opposed to multiple managers for different asset classes.   

As investment consulting firms, plan sponsors and pension funds are taking notice of the potential benefits of MAC strategies, demand for them is increasing. With broad credit fixed-income market exposure and allocation decisions based on seeking value and opportunity, we believe the dynamic approach is well suited to a range of plan objectives, such as: seeking to de-risk equity exposure without completely sacrificing growth; diversifying current bond exposure and potentially pick up a yield differential; and making a “plain vanilla” corporate bond allocation work harder.

We believe managing an unconstrained MAC strategy requires security selection expertise across a global universe of credit opportunities, together with asset allocation skills to be able to combine quantitative metrics with behavioral insights in the portfolio construction.

Specifically, plan sponsors should look for managers who are knowledgeable about the three key factors that guide the relative attractiveness of each asset class at any given time, as follows:

First, a manager must understand the differing valuations and prospective return opportunities of each asset class as a whole. Index characteristics for each asset class can give a representation of metrics, such as the average spread levels or historical default rates.  A view on the stages of the macroeconomic and business cycles can help determine prospective relative return opportunities.

Second, active managers should also consider the likely future behavior of each asset class. Historical correlations and returns may be useful as a guide, but can also be dangerously misleading. New asset classes often exhibit a changing investor base, which affects the behavior of the asset class, particularly during crises.

Third, for active managers engaged in sector rotation and security selection, opportunities may arise when asset classes have a wide variation of returns between the best and worst sectors and securities. A measure of this is the cross-sectional dispersion of returns within the asset class. This can vary dramatically with time and across different asset classes. Managers with high sector and security selection expertise may identify more opportunities to generate total returns in markets that are exhibiting high cross-sectional dispersions.

By David Scott and David Torchia, portfolio managers, and Max Horn, quantitative analyst at Stone Harbor Investment Partners, a global fixed income manager with offices in New York, London, Singapore and Melbourne.