Multi-Asset Credit Strategy: December 2022 Update

January 18, 2023

Multi-Asset Credit Strategy: December 2022 Update

2022 marks a historically poor year for Treasury and credit markets, dominated by aggressive tightening by the U.S. Federal Reserve in efforts to moderate inflation.

PM spotlight

“In structured credit, we see the technical picture as negative and fundamentals mixed, but most bonds are structured well to protect against underlying asset deterioration, making valuations attractive. We favor the sector broadly and are searching for opportunities by picking through the bonds that have underperformed.”

Rich Familetti

Chief Investment Officer, U.S. Total Return Fixed Income

Portfolio composition – asset class allocation (%)

  Neutral Mix December Tactical Tilt
IG corps 20% -10%
Securitized 15% 10%
Private credit 15% 0%
High yield bonds 25% -2%
Bank loans 10% 2%
Narrowly syndicated 15% 0%
December tactical allocation
 November tactical allocation 
10% 10%
25% 25%
15% 15%
23% 23%
12% 12%
15%
 		 15%
 

Multi-asset credit strategy positioning

2022 marks a historically poor year for Treasury and credit markets, dominated by aggressive tightening by the U.S. Federal Reserve in efforts to moderate inflation. This raises expectations for strong fixed income performance in 2023, particularly as inflation cools and central banks get closer to a pause in their tightening activities. As markets shift their focus toward growth rather than Fed policy, we expect more divergence in sector spreads, resulting in increased security selection opportunities.

Within IG, we maintain a tilt towards securitized assets with a preference for short duration asset-backed securities (ABS), where fundamentals remain strong with prospects for spread tightening. Within securitized markets, BBB-rated commercial mortgage-backed securities and subprime ABS sub-sectors are currently seeing recession-like pricing, presenting good buying opportunities.

Across high yield, spreads are attractive, particularly within narrowly syndicated markets. Over the course of 2022, we havefavored floating-rate loans over fixed-rate bonds, as the former have outperformed with Fed policy tightening and rates rising. However, as Fed tightening slows, the tilt between loans and bonds will become less of a duration call and more about the direction of credit. Our near-term outlook for high yield credit defaults is favorable, with expected defaults for loans slightly higher than for bonds. Low issuance and maturities continue to provide price support for high yield.

SLC Management multi-asset credit strategy – summary guidelines 
Benchmark:

50% Bloomberg Barclays US Intermediate Credit Index, 25% ICE BofAMLUS High Yield Index, 25% S&P/LSTA Leveraged Loan Index
Performance target:

Benchmark plus 150 basis points, gross of investment management fees (but net of Operating Expenses), over a market cycle
Duration 2–5 years
Credit quality: BBB/BB average

This information is intended for institutional investors only. It is not for retail use or distribution to individual investors. This information is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon as such. It does not constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information contained in this presentation. The opinions expressed are those of the author(s) as of the date published and are subject to change without notice. These views may not necessarily reflect the views of SLC Management or its investment teams. This document may present materials or statements which reflect expectations or forecasts of future events. Such forward-looking statements are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. As such, do not place undue reliance upon such forward-looking statements. All opinions and commentary are subject to change without notice and are provided in good faith without legal responsibility. Unless otherwise stated, all figures and estimates provided have been sourced internally and are current as at the date of the paper unless separately stated. Unless otherwise noted, all references to “$” are in U.S. dollars. Past performance is not indicative of future results.

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BentallGreenOak, InfraRed Capital Partners (InfraRed) and Crescent Capital Group LP (Crescent) are also part of SLC Management. 

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InfraRed Capital Partners is an international investment manager focused on infrastructure. Operating worldwide, InfraRed manages equity capital in multiple private and listed funds, primarily for institutional investors across the globe. InfraRed Capital Partners Ltd. is authorized and regulated in the UK by the Financial Conduct Authority. 

Crescent Capital Group LP is a global alternative credit investment manager registered with the U.S. Securities and Exchange Commission as an investment adviser. Crescent is a leading investor in mezzanine debt, middle market direct lending in the U.S. and Europe, high-yield bonds and broadly syndicated loans.

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