No flight to safety
Managers were then asked how they would rate their strategy’s performance for the first half of the year? “We’ve been in line with our promises,” responded Fleury. “We have said that we are a low-duration fund. That hasn’t always helped us before in periods like March 2020. However, we have stayed true to that and it has helped our relative performance in 2022. We have said we would expect to perform relatively well in rising inflation, rising rates environment and we have seen this play out. We have also said that we would expect to generally outperform peers in more challenging credit market conditions and it appears this has been the case”.
Regarding benchmarks, Fleury said Janus Henderson’s MACS tended to outperform a 50/50 High Yield/Loans index during difficult market environments and we saw this again in the first half of 2022.
For RLAM, Hussain said he too used a 50/50 benchmark and is 50 bps up this year on that composite so far, which he rated as an okay interim result: “We are where we should be from a risk perspective. We are highly liquid. There is currently virtually zero Emerging Market and IG allocation, while exposure to short duration is pretty high”. He said RLAM was starting to bring the Loans basket down.
“Europe is likely in recession, with the U.S. not far behind,” said Hussain. “We are focused on the impact on the credit markets here, and given the high levels of uncertainty aren’t trying to guess the minor policy decisions. From a positioning perspective, you could say we are ‘hiding in the front end’”.
He was pretty confident that there would be positive returns over the next two years. But he warned asset owners to be prepared for much more pain, especially in private markets. “I have never believed in the illiquidity premium argument for large-scale private credit, as most of that yield premia was for additional risk. Given current valuations between public and private debt, I do think currently we have an illiquidity discount, as you are getting paid less in private credit markets for more risk and more illiquidity,” said Hussain. “Paying a premium not to be told the prices until it blows up; that’s not a particularly nice place to be and that’s the state of the current private credit market. Given the amount of capital raised in private versus public markets, it’s not a surprise that the risk is concentrated here”.
Hussain reckoned that public markets would be beneficiaries by not being contaminated by this shake-out.
Regarding the Sanlam strategy, Desqueyroux said he was disappointed with the negative performance number year-to-date but satisfied with how the Fund has held up against its peers in the tough market backdrop.
He described the Fund’s returns as consistent. “We are happy to sit through the next cycle,” he said. “Basically, we manage financials: they do the heavy lifting in the strategy,” he explained. “Non-financials complete the portfolio and secure the liquidity”.
Desqueyroux foresaw an encouraging outsized alpha in portfolio names when markets come back. “A 1-to-2-year exposure to BBB non-financials can be very rewarding in today’s markets. We keep eyes on players who will offer rate-sensitivity,” he said. “The High Yield lifeline might break”.
On manager performance, Cooney said it was quite noticeable the managers after COVID who looked good on a risk-return chart. He saw differences between these performers and other MACS with shorter duration. That changed again with this drawdown versus March 2020, sending others into the top quartile. “High Quality saw a real reversal of fortunes,” said Cooney. “The moral was that different styles work in different regimes”.
Cooney added that funds’ structure had played a part - UCITS limits on Loans have been detrimental in some cases.
Kerr noted that in previous market volatility, there has been a flight to quality and MACS had performed relatively well. “This year, with the exception of cash, there has been nowhere to put your money and get growth,” he said. He noted, however, that trustees weren’t questioning or complaining. “They have been quite understanding, cognisant of the situation in Ukraine. They are not finding fault with their managers, which is reassuring for them,” said Kerr.
Fleury then responded to McLean’s comment on the fortunes of higher-return-target managers. “At the start of the year, weaker credits did relatively well when it was more of a rate-volatility story. As markets have started to price in the risk of recession, this dynamic has changed”.