Which multi-asset credit fund is right for your scheme?

Multi-asset credit can enable trustees to take advantage of credit market opportunities when they arise, using the complete array of credit types, and, importantly, in a low governance and cost-effective manner.

Multi-asset credit can help generate meaningful, risk-adjusted returns regardless of where a scheme is in the interest rate cycle or credit cycle

The starting point should be to understand what multi-asset credit is and what part it will play in a scheme’s overall strategy.

Multi-asset credit can help generate meaningful, risk-adjusted returns regardless of where a scheme is in the interest rate cycle or credit cycle, and it should also provide valuable diversification benefits. 

However, it generally has lower duration than traditional sterling investment-grade portfolios. It can therefore be considered a ‘defensive’ investment choice for trustees concerned about rising interest rates – but it is not a liability-matching asset.

Most multi-asset credit funds aim to achieve a return in the long term that is over and above that of cash. As defined benefit schemes make increased use of liability-driven investment strategies, these require investments that produce a return in excess of cash over time in order to finance the derivatives driving these solutions. 

Utilising the right type of multi-asset credit for the required return and volatility characteristics can mean it is an appropriate investment to hold alongside LDI. In addition, the yield above cash can be a very useful source of return to help reduce funding deficits.

How to classify MAC products

Multi-asset credit funds typically invest across the credit spectrum, including in assets that would not usually be found in traditional bond portfolios. The range one might expect to find includes:

• Investment-grade corporate bonds

• High-yield bonds

• Emerging market debt (hard and local currency)

• Emerging market corporate bonds

• Asset-backed securities 

• Senior secured loans

The list is not exhaustive and not all multi-asset credit funds will invest across the entire spectrum of credit sectors. Consequently, we believe the most expedient way of classifying these diverse and continuously evolving products is by their long-term performance target over cash, while also considering any secondary focus on capital protection or volatility reduction.

Using this approach, we have grouped the different types of multi-asset credit products into four main categories:

• Defensive (Libor + 2-3 per cent)

• Balanced (Libor + 3-4 per cent)

• Balanced Plus (Libor + 4-5 per cent)

• Aggressive (Libor + 5 per cent and beyond)

Pick a management style

However, there are other important differences between multi-asset credit funds. Broadly speaking, multi-asset credit managers employ two main approaches.

First, top-down, whereby portfolio construction is based around the manager’s macro-economic views and asset allocation to the various credit asset classes. Second, bottom-up, where portfolios are constructed on the basis of ‘best idea’ stock picking across the credit spectrum.

Whatever the management style, a skilful, experienced active manager is essential.

Managers can, according to their style and what the investment return objective is, potentially adopt differing levels of risk management in relation to interest rate and credit risk. The extent to which risk is managed and how it is managed is another important way of differentiating between different multi-asset credit funds.

So, to select a multi-asset credit fund, trustees should decide what part multi-asset credit will play in their overall investment strategy, define the target return and volatility required, consider what credit sectors they wish to access, and lastly, if they prefer a top-down or bottom-up management style – or perhaps a combination of the two.

David Will is senior investment consultant at JLT Employee Benefits