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The whole truth about multi-asset credit strategies

The whole truth about multi-asset credit strategies

This article first appeared in the Modern Investor magazine.

Halfway through my interview with Colin Fleury the calm was shattered by a fire alarm going off in Henderson’s office. Fortunately, Fleury – who is head of secured credit at Henderson Global Investors – assured me that it was a routine weekly drill, and we weren’t in any danger.

Having a regular fire drill at the office to check everything works as it should in case of emergency is standard practice.

However, people all too often forget that the same routine should be applied once in a while to their assets, even if their management is completely outsourced.

The increasingly popular realm of multi-asset credit (MAC) strategies is no exception, says Fleury, who co-manages the Henderson Multi Asset Credit fund.

‘We have to stay very mindful of where we are in the credit cycle and that more hawkish monetary policy will kick in at some point, even if it does not affect us directly,’ he says.

Fleury needs to remain constantly aware of changes in the market, just as site managers must be aware of any potential threats to their buildings. However, the buyers of MAC strategies must also be aware of exactly what is on offer in order to fit the strategy into their broader portfolio.

When it comes to MAC strategies, understanding the biases of the fund and the potential sources of return is crucial given the diversity of products currently on offer, according to a recent report from consultancy firm bfinance.

To put the MAC report together bfinance examined 75 fund performance track records from 60 different asset managers, and within that data set no two products were alike. What is more, some of the strategies weren’t even MAC, despite the label they’d been assigned by the asset manager.

Rising from the ashes

Despite the apparent confusion among some asset managers, there are fundamental features that all MAC strategies have in common. ‘The fundamental idea of MAC strategies is moving away from very core, safe and liquid sectors, such as government bonds, into high yield banks loans and convertible bonds,’ John Amoasi, who wrote bfinance’s report, tells Modern Investor.

‘They really kicked off after the financial crisis. One of the main reasons was that interest rates have been very low, but investors, including pension funds, still have to meet their liabilities. So they moved away from high-quality government bonds and investment-grade corporates into the likes of high yield bonds or bank loans to access returns there.’

MAC strategies have also been seen by pension funds as a way to de-risk, Amoasi says. ‘Pension funds have been selling some of their equity exposure and buy into MAC strategies. By doing this, they are looking for high single-digit returns with much lower volatility.’

There is at least one other big reason why pension funds, especially smaller ones, would be tempted to invest in the strategy: by outsourcing the investment decision process, they speed it up significantly, as well as broadening their investment universe to include more alternative credit asset classes.

‘The decision-making process of a typical pension fund’s trustee board is not very quick. So many of them outsource the burden of making those decisions to asset managers in order to make it more dynamic.

‘Also, the bigger pension funds have in-house teams and pretty much do bond allocation by themselves. But if you look at smaller to mid-size pension funds, they get better allocation to different sectors of the fixed income market with MAC strategies.’

Henderson’s Fleury says most of the interest is coming from UK-based clients. ‘We have about 20 institutions in the fund now, and that ranges from small pension funds with less than £500 million in AUM up to very large corporate investors.’

Regular security checks

A typical MAC strategy is split equally between high yield bonds and bank loans, but they have the flexibility to go into convertible bonds and other sectors.

For instance, the Henderson Multi Asset Credit fund, managed by two Citywire AAA-rated managers, Fleury and David Millward, invests in three principal asset classes: secured loans, asset-backed securities and high yield bonds.

Fleury says the fund had more of a niche style than many other MAC offerings, as it focuses on the secured credit part of the market. ‘We use asset-backed securities primarily as a more defensive part of our portfolio,’ he says. ‘If we feel that the cycle or potential market volatility is looking like it’s going to spike you can expect to see us increase allocation to asset-backed securities. Other MAC strategies might chose to use investment-grade bonds.’

They are also flexible in terms of the countries they invest in. ‘We are generally biased towards Europe because we are seeing great opportunities in the secured space there. One of the drivers for that is that is that the European credit market has historically been far more dominated by banks, and as those banks have been pulling back and have less risk appetite, we feel this is a great opportunity for long-term institutional investors.’

However, the fund had the option to move into US high yield bonds if they see an opportunity there.

This flexibility is another feature that all MAC strategies have in common. It’s one of their largest selling points, but can also pose a risk, especially for smaller investors.

That’s why constant security checks – similar to office fire drills – are a good idea. However, selecting the right manager is even more crucial, as it may significantly reduce the risk of a fire breaking out.

‘The main risk in MAC strategies is manager risk because mid to small pension funds are outsourcing their decision process to a manager, who gets a lot of flexibility,’ Amoasi says.

‘If you look at a typical MAC, the risk of a manager making the wrong call is something that is very prominent in these strategies. That’s why selecting the right manager is key.’

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