Five reasons to invest in Multi-Asset Credit

Multi-Asset Credit (MAC) is an active, unconstrained fixed income strategy that aims to capture global credit risk premiums by investing in a broad range of credit instruments.

While broader fixed income strategies maintain sizeable allocations to government bonds and investment grade (IG) corporate bonds as they aim to limit downside and smooth returns over the market cycle, a recognised MAC strategy will normally maintain full exposure to credit, looking through short-term volatility to target significantly higher income and total returns.

MAC strategies are routinely used by institutional investors such as pension schemes, because their longer term investment horizons can be more suited to riding out the volatility associated with higher yielding or less liquid credit assets in pursuit of those higher returns. Other investors may use a MAC strategy as they prefer a credit specialist to manage their more risk-on exposure, while holding their government and IG corporate bond allocations in other mandates.

As fixed income specialists, at TwentyFour our MAC strategy looks to enhance returns by targeting additional premiums in markets that tend to be underrepresented in other portfolios, such as subordinated financials and collateralised loan obligations (CLOs). TwentyFour’s MAC strategy is focused on the more liquid end of the credit spectrum, allowing it to be daily dealt, which we believe is a key differentiator against the many monthly and quarterly dealt strategies in this space that tend to offer exposure to less liquid assets such as corporate loans and private credit.

Here are five potential benefits of a MAC strategy: 

1. Higher target returns

In fixed income, starting yield has historically been one of the best predictors of future returns. Over the last 40 years, across various credit cycles, starting yield has been strongly correlated with total return over a five-year investment period ¹. 

By maintaining full exposure to credit at most times, a MAC strategy looks to capitalise on this relationship by building a diversified portfolio with high starting yield. The goal is then to minimise default risk through bottom-up credit research and individual security selection, to ensure the portfolio achieves that yield over the longer term.

2. Access to specialist sectors

Because of their higher tolerance for short-term volatility, MAC strategies can carry greater exposure to more specialist credit markets, which can experience larger drawdowns in a market downturn but are generally expected to outperform lower risk investments over longer investment horizons.

Asset classes such as corporate hybrid bonds, subordinated financials and asset-backed securities (ABS), including CLOs, can offer a spread premium over more mainstream fixed income markets which MAC strategies can attempt to capture.

3. Dynamic asset allocation 

Credit markets do not move in lockstep, which can create opportunities for active managers. A fully flexible MAC strategy that looks to maintain good liquidity can adjust its holdings quickly between different sectors and geographies at various points of the cycle, allowing its managers to seek relative value for investors when they think credit spreads have widened unduly, for example.

This agile approach is also key for managing risk as economic and market conditions evolve. A MAC manager can dial credit risk up or down depending on the age of the cycle, holding higher yielding assets when conditions allow and increasing higher quality segments such as IG corporate bonds and highly rated financials if they anticipate more challenging periods.

4. Diversification

A MAC strategy looks to mitigate default risk by diversifying its exposure across a range of markets and geographies, ensuring that a problem with one issuer or one sector does not have a disproportionate impact on the overall portfolio.

Predominantly floating rate assets such as ABS and CLOs have historically shown a low correlation with broader fixed rate credit markets, making them a valuable diversifier particularly when the path for interest rates is less certain.

5. Lower volatility 

Credit markets have historically exhibited lower volatility than equities, which tend to be more reactive to broader economic factors and corporate earnings data. This is largely attributed to the income generated by credit, which can help to cushion a portfolio’s total return against a negative market shock.

Therefore, a MAC strategy can be well suited to investors who want to reduce their equity exposure but retain their “risk-on” positioning and still target an attractive level of income.

Why TwentyFour?

TwentyFour Asset Management is a specialist active fixed income manager with a global investment approach.

Our MAC strategy, launched in 2015, combines high conviction credit positions in a relatively concentrated, long only portfolio, with the objective to generate higher income and total return than broader multi-sector bond strategies.

MAC is run by a vastly experienced, low-turnover team of fixed income specialists based in London and New York, led by multiple TwentyFour Partners. This stability helps us maintain deep expertise in fields such as asset-backed securities (ABS) and financials, which helps to differentiate our MAC strategy.

While many peers have a heavy bias towards US credit, our presence and expertise in Europe means we can target premiums in specialist areas of European credit such as CLOs and subordinated bank and insurance bonds, offering true diversification for investors. 

In our view, targeting relative value across the global credit market is the best way for a MAC strategy to target a high level of income and the opportunity for capital growth.