Sponsored article


Investec’s MAC opportunity: Dynamic. Diversified. Defensive.


Credit is a diverse investment class, cover- ing different asset types, maturities, regions and risks. Investec’s multi-asset credit (MAC) strategy is one way of navigating through the complex world of multi-asset credit. It targets higher yields while control- ling risk by diversifying across different credit segments.


Its approach is bottom-up driven, actively managed, has low sensitivity to interest rates and takes the operational burden off investors. Here, Investec’s MAC team explain why investors should consider multi-asset credit and how they work to meet target returns while minimising risk.


MAC – FOR TODAY’S FIXED INCOME MARKETS It’s been a strong year for the fixed income markets, fuelled by a strong rates-based rally. However, the rally has centered on defensive assets and that’s a reflection of where we are in the cycle. It also has not been uniformed and parts of the market have started to look increasingly expensive and a little vulnerable given the strength of the rally we have seen.


A core defensive building block for inves- tors portfolios has been government bonds, which in the past have generated attractive yields. That has gone away to an extent, given the rally we have had in bond markets.


A third of bonds around $17trn (£13.1trn) – are negative yielding, according to Bloomb- erg data from August 2019. There are ques- tion marks over how low yields can go. If


interest rates increase, government bonds are vulnerable to significant capital losses. We believe MAC is a means of plugging that gap and providing a defensive yield in a non-interest rate sensitive manner. MAC seeks to achieve an attractive yield in a yield-challenged world. Looking at the spectrum of MAC strategies available in the market, there are some higher-octane strategies looking for higher returns with higher levels of risk as well as some defensive strategies. The majority of MAC managers, including our own, fit into the middle ground, seeking cash plus 4% to 5%. However, within this subset there are numerous ways managers aim to achieve this return profile.


A MAC approach, where the manager has a lot more levers to manage through differ- ent environments, we believe, leads to a better outcome. It’s the opportunity provided by having divergent performance across different credit asset classes but, importantly, also in terms of how MAC can manage the down- side. This is the big appeal of MAC strate- gies to many investors; getting attractive yield but with good downside management.


BOTTOM UP & GENUINELY DIVERSIFIED


There are various ways managers approach MAC. Some are top-down driven, for exam- ple, by making a call that US high yield will outperform European high yield. What we do at Investec is very much bot- tom-up driven based on where we see


value. We use the phrase “pulled to value”. One of the beauties of credit markets is that there are significant inefficiencies in the way credit risk is priced. That comes down to local supply/demand dynamics, the con- struct of markets, and even the stickiness of the investor base. When we look at a par- ticular credit, it will often issue bonds or loans in multiple markets but the spread you could earn on that will differ from mar- ket to market because of those different dynamics or technicals within those markets.


Using a bottom-up analysis, we are assess- ing where we get best paid for a given level of risk. That is the primary driver of our asset allocation. Seeing more opportunity or certain markets re-pricing over other markets, that drives the asset allocation. Our fundamental analysis allows us to deliver far more consistently than taking big top-down calls, where the outcome is more binary and the error rate can be high. The other big differentiator is our willing- ness to use not only the breadth of opportu- nity sets – we have different levers and dif- ferent markets to invest in – but a willingness to move within these markets over time.


This means that our asset allocation rela- tive to a lot of our peers has historically shown a lot more dynamism.


And where certain parts of the credit mar- ket become expensive or vulnerable from a technical perspective, we do not want to be in those markets. Consequently, we have held zero allocations in pretty much all of our markets at different points. Then there have been times we have had as much as 40% of our assets invested in the core credit segments. Many of our peers have a long-term structural allocation to certain markets, while we are fundamentally


22 | portfolio institutional | November 2019 | issue 88


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6