Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. INVESTING & PORTFOLIO STRATEGIES
February 19, 2018 12:00 AM

More seek multiasset credit strategies to diversify return stream

Christine Williamson
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    James E. Keenan said pension funds are trying many different things to keep liabilities manageable.

    Faced with an expansive, complex array of credit investment options and an urgent need to incorporate them into their portfolios as a way to drive returns, asset owners increasingly are turning to multiasset credit strategies.

    Managers of MAC strategies, also called multisector fixed-income funds, report high interest and strong inflows into portfolios, which invest across a wide spectrum, from liquid, publicly traded investment-grade and high-yield bonds to illiquid private credit instruments such as securitized strategies, middle-market lending and specialty financing to industries including aviation and entertainment.

    "Interest in multiasset credit portfolios has picked up materially in the last six to nine months as investors seek to diversify return sources and manage drawdown risk," said Maura T. Murphy, vice president and co-portfolio manager at fixed-income specialist Loomis Sayles & Co. LP, Boston.

    Loomis Sayles managed a total of $268.1 billion as of Dec. 31, of which $5.7 billion was in multiasset credit strategies.

    Recent investors in multiasset credit funds include:

    Florida State Board of Administration, Tallahassee, which committed $200 million from the $167 billion Florida Retirement System to DoubleLine Opportunistic Income Master Fund, managed by DoubleLine Capital LP; St. Louis Public School Retirement System, which committed $35 million from the $866 million fund to Neuberger Berman Investment Advisers LLC's Global Opportunistic Fixed Income Fund; the $3.8 billion San Mateo Employees' Retirement Association, Redwood City, Calif., which committed $80 million to PIMCO Diversified Income Fund, managed by Pacific Investment Management Co. LLC; and the $312 million Hollywood (Fla.) Employees' Retirement System and the $340 million Boca Raton (Fla.) Police & Firefighters Retirement System, both of which made commitments of $12 million and $17 million, respectively, to GoldenTree MultiSector fund, managed by GoldenTree Asset Management LP.

    'Thinking differently'

    To match pension fund liabilities in what is expected to be a low-return environment, institutional investors are "thinking differently, turning to different tools and different assets" to increase returns, said James E. Keenan, chief investment officer and global co-head of credit at BlackRock Inc., New York. "Everyone is out there looking for a way to increase returns" and the new assets they are turning to are found in the private credit segment of the market, Mr. Keenan said.

    BlackRock managed $6.3 trillion as of Dec. 31, $1.9 trillion of which was in fixed income. Mr. Keenan oversees $82 billion in credit investments. BlackRock does not break out assets managed in multiasset credit strategies.

    Napier Park Global Capital LP, New York, has attracted $10 billion to its credit strategies in the five years since the firm's launch in 2013, including $4 billion in MAC investments, said James M. O'Brien, senior managing partner and CEO.

    Napier Park invests exclusively in what Mr. O'Brien labeled specialized credit — highly complex, illiquid credit niches including aircraft and railcar leasing, collateralized loan obligations and specialty lending in the form of directly originated mortgage and consumer loans among other instruments.

    Napier Park is seeing more interest in and demand for its MAC strategy this year, Mr. O'Brien said, noting that the firm's investment structure "allows us to dynamically allocate capital where there's value."

    Among recent commitments to the Napier Park MAC approach is a $180 million allocation from a Taft-Hartley pension plan for a diversified credit allocation. Mr. O'Brien said he could not identify the investor.

    Sources said MAC strategies emerged at the beginning of the decade when it became clear to some investors that unconstrained bond approaches had failed to diversify traditional bond portfolios and improve returns.

    "Performance of unconstrained bond funds has not lived up to expectations. The scenarios managers were counting on clearly didn't come to pass," said Kevin D. Machiz, vice president and fixed income-consultant in San Francisco-based Callan Inc.'s global manager research group.

    MAC strategies have evolved from the early days, when the furthest that managers dipped down the credit complexity scale was to corporate high-yield bonds, leveraged loans and collateralized debt obligations, said Thierry Adant, credit research consultant in the New York office of investment consultant Willis Towers Watson PLC.

    Many MAC strategies now incorporate complex, illiquid securitized products, multiple forms of distressed debt and esoteric financing strategies.

    By adding exposure to a much wider universe of credit instruments that are actively managed, Callan's Mr. Machiz said "there's more potential for outperformance," adding that analysis shows active fixed-income managers outperform passive approaches on a historical basis and are less correlated to each other.

    Creating and managing a private credit portfolio can be problematic for institutional investors, particularly smaller, less well-resourced pension funds, observers said.

    "The private credit universe has many illiquid niches and its complexity creates barriers to investment for institutional investors," Willis Towers Watson's Mr. Adant said.

    Constantly raised issues

    Tactical asset allocation and dynamic management of credit portfolios are issues constantly raised by institutional CIOs across the U.S., Asia and Australia in conversations about MAC strategies, said Matthew Toms, senior vice president and chief investment officer-fixed income, Voya Investment Management LLC, Atlanta.

    "There's real frustration about lost investment opportunities" for many pension executives because the governance structure of their pension fund inhibits their ability to respond quickly enough to commit to private credit deals or rebalance credit portfolios, Mr. Toms said.

    "The question for pension funds is whether they should complement what they have now in fixed income with individual strategies or invest in a single diversified strategy," Mr. Toms said.

    Voya managed a total of $222 billion as of Sept. 30, of which $151 billion was in fixed income. Voya does not break out the assets managed in multiasset credit strategies.

    BlackRock's Mr. Keenan said building and maintaining a 25-manager private credit portfolio is "difficult, expensive and takes a lot of time" and stressed that rebalancing and appropriately weighting allocations to the managers in the portfolios is the most difficult — and important — part of the investment process.

    "Multiasset credit portfolios need dynamic rebalancing to capture the return dispersion between geographic areas and sectors. It's hard to do that if you're invested with multiple managers," Mr. Keenan said, adding that rebalancing is an integral function of multiasset credit strategies.

    Big credit managers like BlackRock notwithstanding, "credit grew up in boutiques," said a source who preferred anonymity, who noted that the expertise and experience of smaller specialist managers bring to private credit investing remains in high demand by institutional investors.

    In fact, institutional investors were the impetus behind the addition of multiasset credit strategies by many boutique managers, sources said.

    Stone Harbor Investment Partners LP, New York, for example, created its multiasset credit approach in 2011 after a request from consultants and prospective clients for a strategy to help them achieve fixed-income returns between 6% and 7%, said David A. Torchia, portfolio manager-multisector strategies.

    Stone Harbor takes a top-down approach to determine the asset allocation and relies on the bottom-up investment decisions of its specialist strategy for security selection, Mr. Torchia said. "Multiasset credit is our team sport," he added.

    The strategy is liquid, relying on a mixture of traditional fixed-income securities, global high-yield bonds, bank loans, and emerging markets sovereign debt in hard and local currency. In managing the portfolios, Mr. Torchia used exchange-traded interest rate futures to manage duration and yield curve; index credit derivatives to hedge both credit positions and establish long exposures; and currency forwards for active currency positions as well as hedging to investor base currency.

    The original strategy relies on a core diversified portfolio with between 800 and 900 securities, but at the behest of clients, Stone Harbor also created a more concentrated "best ideas" portfolio of 100 to 125 securities, Mr. Torchia said.

    Stone Harbor managed a total of $35 billion as of Jan. 28 for an all-institutional client base, of which $5 billion was run in multisector fixed income and of that, $2 billion in the firm's MAC strategy.

    Long-only MAC strategy

    Credit hedge fund specialist CQS (U.K.) Ltd., London, was asked by an investment consultant to create a long-only MAC strategy for its clients in 2012, said Craig Scordellis, partner and head of long-only multiasset credit. With money from the consultant and seed investors, CQS managed a shadow portfolio for a year and formally launched its strategy in 2013.

    Inflows have been "substantial" over the years, Mr. Scordellis said, with U.K. pension funds forming the initial investor base augmented over time by Japanese and Australian institutions and, more recently, by U.S. pension funds.

    Assets managed in CQS' MAC strategy accounted for $5.5 billion of the firm's $14.5 billion in total assets as of Jan. 31.

    "The big benefit of a multiasset credit approach is that it encompasses a very broad spectrum of possible investment strategies which allows you to really uncover sources of alpha," Mr. Scordellis said.

    With access to the full credit liquidity spectrum, CQS' portfolio managers use a bottom-up approach to take more risk in credit instruments while the top-down asset allocation process manages portfolio weightings.

    "The skill set from CQS' hedge fund heritage — the tactical nimbleness in identifying the right asset class in the right geography at the right time — informs how we manage the long-only multiasset credit portfolio," Mr. Scordellis said.

    Related Articles
    Bracing for a rough ride
    Long-duration strategies take bonds mantle from high yield
    Private credit strategies in stratosphere
    Institutional investors flock to private credit
    Long-duration strategies take bonds mantle from high yield
    Private credit strategies in stratosphere
    Institutional investors flock to private credit
    Commentary: Baring their teeth – FAANGs take a bite out of the equity market
    Marketplace loans rising in investors' estimation
    Moody's: Money manager net inflows up for second consecutive quarter
    Fidante takes minority stake in event-driven manager Latigo Partners
    Microcaps becoming a popular source in hunt for alpha
    CQS adds global head of strategy and business development for distribution
    Hedge funds post mixed performance in March, HFR reports
    S&P warns leveraged loan market could 'turn sharply'
    Commentary: Credit investing – bias beware as the cycle turns
    Commentary: Time to do some spring cleaning on your portfolio
    Australian funds extend management reach
    Need for daily liquidity quashing innovation in multiasset strategies
    Recommended for You
    More funds testing water on crypto-related assets
    More funds testing water on crypto-related assets
    Money managers eager to make leap to opportunity zone investing
    Money managers eager to make leap to opportunity zone investing
    Index investing: Not as passive as you might think
    Index investing: Not as passive as you might think
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    The Future of Infrastructure: Building a Better Tomorrow
    Fulcrum Issues: Equity Returns and Inflation — Choose Your Own Adventure
    What Matters Most in Considering a Private Debt Strategy
    Why pursue direct lending in the core middle market?
    Research for Institutional Money Management
    Are Factors a Thing of the Past?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing