PORTFOLIO INSIGHT


We are trying to achieve a return over time with the minimum amount of risk. That is a different approach to meeting or beating a benchmark, where risk is not even a consideration. Multi-asset credit as a category has grown recently. Many of these managers typically take a different approach to us with the most common approach in this area being: “What is the hot area?” This is a top-down managed approach. A look at how individual sub- segments of


credit have per-


formed over time shows that there is an enormous variability between segments. Identifying ahead of the fact which segment is going to do well and which might struggle is challenging. To do that consistently over time, quarter- by-quarter, year-by-year, is extremely chal- lenging. This is why we developed a bottom- up approach seeking individual opportunities that help us to achieve our risk and return targets.


compared to how it was structured in the last quarter or last year, you will see enor- mous value created by our team. It is that dynamism, that activity of management and being willing to move the fund around and find individual outstanding opportunities that differentiates us from many other man- agers of more strategic or static funds. Due to the popularity of some credit asset classes, such as direct lending, are you tak- ing more risk for lower returns? As spreads tighten and lending conditions become more competitive, many people would be willing to take more risk to achieve their target return. We go the other way. When spreads get tighter, covenants get lighter and competition for assets gets higher, we back off. We are willing to under-yield our return tar- get for a period to protect capital, to make sure that we are not taking excessive risk just because the competitive situation requires it. We do not target a yield; we target a return


It may well be the end of the credit cycle, but it might last another year, another 24 months or maybe even longer. From that perspective, we do not want to make these difficult big top-down positioning calls. We would rather take a bottom-up, deal-by-deal approach to find sensibly priced risk. In an environment such as this, we tend to to stay clear of segments which are compet- itive and where you are not being paid for the risk. Instead we focus on areas that are more attractive, maybe more defensive, but we are not quite as defensive as we were towards the end of 2018.


One of the reasons why


efficiencies are permanent in credit markets is that there are rating biases.


on average over time. That means, in peri- ods as we are in now, we tend to get more defensive.


In that regard we are quite different from our peers. That shows in the numbers because when the drawdown period comes, when the market goes through a difficult time, our fund holds up extremely well compared to the individual segments that go into it and often at times when compared to our peers.


A look at the change within the fund pro- vides further evidence that we do things slightly different to our peers. If you look at how the fund was structured last week,


When other investors are doing riskier deals with poor covenants and tight spreads, we aim to protect our money, we keep our powder dry. This is one of the reasons why I mentioned our large exposure to AAA and AA tranches of the CLO market. That is a way we can get out of areas that are compet- itive and into assets where we can protect future returns and minimise the downside. Is this how you are preparing for the end of the credit cycle? The end of this credit cycle seems to have been upon us for about three years and we are still waiting for it to materialise. It is the never-ending credit cycle.


There is a risk that the issuers of fixed in- come investments may not be able to meet interest payments nor repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss. There may also be insufficient buyers or sellers of particular investments giving rise to delays in trading and being able to make settlements, and/or large fluctua- tions in value. This may lead to larger fi- nancial losses than might be anticipated. All data as at 30 September 2019. Except as otherwise authorised, this information may not be shown, copied, transmitted, or otherwise given to any third party with- out Investec' prior written consent.


In the fourth quarter of last year the fund had, on average, investment-grade ratings of BB. The fund is quite dynamic, so in an extreme case it might have a B credit rating, on average. In a defensive positioning, it might have a BBB rating, and in the fourth quarter of last year that was the case. We weathered that storm extraordinarily well. We had one of the lowest drawdown ratios in the market compared to our peers. That is an example of how the fund can be positioned defensively. We are not that defensively posi- tioned today with an average credit rating of BB+, which in the scheme of things maybe slightly more conservative than the fund’s historical average.


Issue 88 | November 2019 | portfolio institutional | 25


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