Over the past 48 months, global markets have experienced volatility driven by the Fed’s tightening monetary policy, evolving geopolitical issues and broader macroeconomic factors. This has created a "non-obvious" market where investors need to look beneath the surface and across asset classes to quickly identify compelling relative value. Many investors are making static decisions based on quarters and years, while markets are moving in days, weeks and months. This disconnect risks leaving opportunities on the table, particularly for those confined to traditional fixed-income strategies.
To achieve both resilience and consistent growth, investors should embrace strategies that are flexible, diversified and adaptable across market cycles. A multiasset credit (or MAC) approach embodies these traits efficiently and at scale. In today’s elevated rate environment and slowing economic growth, we believe MAC helps capture relative value through dynamic capital allocation, offering a diversified risk-reward model with consistent income and the potential for principal appreciation — making it a compelling choice for those aiming to maximize returns while managing volatility.
What is multiasset credit (or MAC)?
MAC is an investment strategy that seeks to optimize and manage risk by diversifying across various global credit asset classes. A MAC portfolio includes a range of credit instruments, such as high-yield bonds, leveraged loans and structured credit. Key benefits include:
- Flexibility: MAC adapts to market conditions by shifting allocations among asset classes and geographies. For example, during periods of rising interest rates, the portfolio can be adjusted to include more floating-rate instruments to benefit from higher yields. Investing across jurisdictions also provides the flexibility to take advantage of diverse economic conditions and regulatory regimes, enhancing overall portfolio resilience and return potential.
- Diversification: MAC helps mitigate risk by reducing exposure to single asset classes or issuers. This blend of asset classes and strong credit selection can offer a better risk-adjusted return compared to traditional fixed-income products. By carefully constructing a MAC portfolio, investors can potentially achieve higher returns without proportionately increasing the level of risk.
- Ease of access: Historically, commingled MAC products were only available to larger institutional investors. Today MAC is accessible to a broader range of investors, providing more investors the ability to build diversified portfolios across multiple asset types at scale.
- Liquidity: A fully liquid MAC product enables managers to be nimble during volatility and provides easier access to funds for redemptions or rebalancing.
- Operational efficiency: MAC consolidates multiple asset class exposures into one access point, streamlining due diligence, reporting, and reducing the need for multiple managers. This provides operational efficiency for limited partners and reduces the need for LPs to engage with multiple managers for portfolio updates, reporting and administrative items.
Growth of the MAC product opportunity set
The provision and globalization of credit have been key drivers of the growing MAC opportunity, underscoring the importance of exposure to this strategy. Including global direct lending and asset-backed lending, the total addressable market nears $40 trillion. This growth is fueled by current macroeconomic conditions and the ongoing structural shift towards alternative credit.
Many investors experienced a rude awakening when a world of low rates rapidly became one of elevated rates, catalyzing realized losses in many portfolios. This change is expanding the universe of credit products and creating new opportunities for MAC strategies to capture value across different credit segments. The ability to take advantage of the interplay among different asset classes supports thoughtful capital allocation and portfolio management decisions for optimal yield and positioning for relative value.
Not all MAC strategies are created equally
Despite the increase in MAC strategies over the past decade, not all approaches are equal. It is important to look for scaled and experienced managers that not only excel in portfolio construction and asset allocation research, but also incorporate deep fundamental credit selection into their investment processes.
We believe a MAC strategy should not rely on elevated trading with high portfolio turnover, but rather on, deep underwriting and asset allocation research that takes fundamental credit metrics into account. MAC portfolio construction should adapt based on market movements and expectations for how the market will perform. In our view, this requires integrating qualitative and quantitative inputs to assess risk/reward in each asset class.
We have seen how the continuous monitoring of asset class behaviors and metrics can help inform correlations and deviations. For instance, analyzing asset classes across markets to identify peak drawdowns, recovery timelines, variations between ratings, as well as behavior following each Federal Open Market Committee meeting, all of which can influence portfolio decisions.
A scaled process that leverages an efficient frontier model, quantitative framework, and research helps inform portfolio construction. In mathematical terms, the efficient frontier is the boundary of the practical region formed by plotting risk (typically measured by standard deviation or variance of returns) on the x-axis and expected return on the y-axis. Portfolios on the efficient frontier dominate those below it, meaning that for any given level of risk, they provide higher expected returns.
The efficient frontier helps in identifying the right combination of assets that minimizes overall portfolio risk while maximizing returns. Mean-variance optimization approaches strive to generate optimal portfolios on the efficient frontier by taking expected return, volatility, and emphasis on lower correlations among asset classes into account. This guides baseline allocations and enables a portfolio manager to calibrate portfolios that satisfy the desired risk/return appetite.
MAC in action
Continuously assessing relative value across global markets is core to dynamic asset allocation. Managers that apply relative value indicators from both spread and yield perspectives are more equipped to spot potential dislocations between assets. In late 2023, we saw fixed vs. floating-rate assets nearing fair value and began increasing fixed-rate exposure. Our asset allocation process identified European high yield as a relative value opportunity over U.S. high yield, providing a rotation into higher-quality credit with better spreads. We found that relative value indicators can be very effective and have statistically backtested each pair of assets to determine whether they have been effective in the past. Typically, these results help build conviction in the methodology and can be an essential step to making asset allocation decisions, either catalyzing an allocation shift discussion or calibration of the potential risk/return trade-off.
Structured credit was another relative value play, as CLO debt offered superior carry and diversification in late 2023. By supplementing a leveraged loan allocation with CLO BBs, investors could have captured over 300 basis points of carry while staying above the historical median. This allocation generated 100-plus basis points of alpha over the last 12 months, demonstrating the value of a robust asset allocation framework.
Ultimately, we believe a multiasset credit strategy can offer a compelling and efficient way to navigate complex market environments, providing diversification, flexibility and enhanced risk-adjusted returns. The MAC strategy can also be used as a portfolio tool: We have seen the benefits of including a MAC allocation in customized multiasset solutions (or “MAS”) as many asset allocators consider incorporating MAC as a part of their semi-liquidity allocation in a broader portfolio of private and public assets. As the market continues to evolve, MAC can play a critical role in the total portfolio asset allocation, both as a strategic allocation and one that is abundant in liquidity.
Jeremiah S. Lane is partner, head of U.S. leveraged credit; Kris Novell is managing director, head of asset allocation research; and Tal Reback is director, global investment strategist, at KKR, all based in San Francisco. KKR and its funds are borrowers, investors and arrangers of public and private corporate debt. This content represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I’s editorial team.