Can multi-sector fixed income strategies offer investors positive returns?

André Kerr (Partner - head of investment, XPS)
Chelsea Parandian (Senior investment consultant, Aon)
Colin Fleury (Head of secured credit, Janus Henderson Investors)
Nick Cooney (Senior consultant, LCP)
Azhar Hussain (Head of global credit, Royal London Asset Management)
Brendan McLean (Head of manager research, Spence)
Guillaume Desqueyroux (Fund manager, Sanlam Investments)
Kunal Chavda (Director, fixed income, bfinance)

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Markets suffered badly in the first half of 2022, with very few bond indices in positive territory and several exhibiting double-digit losses. By the third week in June, Loans were down 4% while High Yield had lost 13% and Investment Grade (IG) almost 15%. Inflation, exacerbated by the Russian invasion of Ukraine and Covid-related supply chain blockages, forced policymakers into action.

The CAMRADATA multi-sector fixed income roundtable thus began by reviewing bond markets and discussing whether there had been refuges for go-anywhere, long-only strategies. Guillaume Desqueyroux, co-manager of the Sanlam Credit Fund and invested mainly in Global IG, HY and Unrated, said that the shorter the duration in your portfolio, the better: “The inversion of the curve was painful but still the best place to be”. He included cash as an option here.

Colin Fleury, co-manager of Janus Henderson’s Multi-Asset Credit Strategy (MACS), said that securitized and floating-rate issues had been “relative saviours”. Both outperformed significantly on a total return and excess return basis, although that still left drawdowns. He highlighted Asset-Backed Securities (ABS) for taking out some of the rates impact.

Fleury stressed that the Janus Henderson MACS had been tactically favouring loans and securitized before this year. “We have started looking the other way as High Yield got cheaper,” he said.

His final mention was for cross-over index protection trades. “They haven’t saved us but did deliver some protection".

Azhar Hussain, head of global credit at Royal London Asset Management and co-manager of its MACS, said that cash has been the only saviour so far this year. He has held 5-10% in the strategy. Loans he did describe as a safe haven, although he qualified that they have insulated against rate volatility, not spread volatility.

Govvies, Hussain joked, were not even return-free investments these days, down more than most credit indices. He said that being active in High Yield had really helped “set us up nicely for an environment that is full of uncertainty”.

Kunal Chavda, director of fixed income research at bfinance, confirmed the managers’ summaries: “Everything had been really badly hit this year with few places for credit investors to hide,” he said. “The efficacy of diversification across credit asset classes to mitigate the downside from risk-off events has been reduced”.

Looking to the wider picture, Chavda said that the impact of inflation on supply chains was proving hard to unwind, meaning fundamental credit analysis remains key.

Andre Kerr, head of investment research at XPS Group, a pension fund consultancy, saw one small comfort in that the strengthening dollar might have dampened losses. He agreed that cash is always a safe haven, but noted that defensiveness was being eroded by rising prices.

Kerr suggested that illiquid assets, an increasing percentage of pension funds’ total allocation, might have had some protection. Fleury questioned whether illiquids looked resilient merely because they weren’t marked to market. He noted that Private Credit strategy returns seem to still be marketed around 6-8%. “That range hasn’t moved for a while. If that is true, then public markets are now a screaming good buy,” he said.

Nick Cooney, senior consultant at investment advisory firm LCP said that Private Credit was not part of MACS in LCP’s categorisation. He explained that the firm did recommend one MAC at the high end of returns that could allocate over 50% to CCCs. Other recommendations, however, are lower risk, lower return.

On Private Credit, Cooney said the valuation argument was relevant. “It’s a question in the current environment whether to have private credit or liquid bonds”. He suggested investors had more control over private credit than covenant-lite public issues which offered fewer actions to take against borrowers, but relative valuations in the current environment were important.

Chelsea Parandian, senior investment consultant at Aon, a global investment consultancy, said: “I just don’t think there have been many places to hide in 2022. I hear this phrase ‘unprecedented’ a lot from managers, but I disagree with that: what we have seen are extremely rare conditions, but not unheard of or unpredictable”.

She noted that some managers had made prudent moves before the Russian invasion, including into shorter-duration High Yield and commodity-linked issuers.

Brendan McLean, head of investment research at Spence, a UK pension fund consultancy, said that higher-risk, higher-return MACS had generally faired better than their lower-risk, lower-return peers. “It is counter-intuitive in falling markets,” he said, “but greater exposure to Loans was a major explanatory factor due to their low duration”.