Multi-Asset Credit Strategy: January 2023 Update

February 17, 2023

Multi-Asset Credit Strategy: January 2023 Update

Treasury and credit markets returned 3% in January, according to the Bloomberg US Aggregate Index, following outsized negative returns for fixed income in 2022. Investors feel optimistic about fixed income performance as inflation cools and central banks get closer to a pause in their tightening activities.

PM spotlight

“Takeaways for the year are expected solid issuance, more cross border and structured transactions, and increasing competition for deals. Our goal this year, and every year, is to provide our clients with the best relative value in the market through diligent underwriting and a strong origination effort that leverages our credit and structuring expertise.”

Andrew Kleeman

Senior Managing Director, Head of Corporate Private Placements

Portfolio composition – asset class allocation (%)

  Neutral Mix January Tactical Tilt
IG corps 20% -10%
Securitized 15% 10%
Private credit 15% 0%
High yield bonds 25% 3%
Bank loans 10% 0%
Narrowly syndicated 15% -3%
January tactical allocation
 December tactical allocation 
10% 10%
25% 25%
15% 15%
28% 23%
10% 12%
12%
 		 15%
 

Multi-asset credit strategy positioning

Treasury and credit markets returned 3% in January, according to the Bloomberg US Aggregate Index, following outsized negative returns for fixed income in 2022. Investors feel optimistic about fixed income performance as inflation cools and central banks get closer to a pause in their tightening activities. As markets shift their focus toward growth rather than the U.S. Federal Reserve’s policy, we expect more divergence in sector spreads, resulting in increased security selection opportunities.

Within IG, we maintain a tilt toward securitized assets. For example, within BBB-rated commercial mortgage-backed securities, some holdings are trading at significant discounts to our fair value models. We also like short duration asset-backed securities (ABS), where fundamentals remain strong. ABS spreads have tightened since December and were one of the top outperformers last year.

Across high yield, spreads are attractive. We prefer high yield bonds over loans. Our near-term outlook for high yield credit defaults is favorable. Low issuance and maturities continue to provide price support for high yield. Over the course of 2022, we have favored 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.

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

50% Bloomberg Barclays US Intermediate Credit Index, 25% ICE BofAML US 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.

SLC Management is the brand name for the institutional asset management business of Sun Life Financial Inc. (“Sun Life”) under which Sun Life Capital Management (U.S.) LLC in the United States, and Sun Life Capital Management (Canada) Inc. in Canada operate. Sun Life Capital Management (Canada) Inc. is a Canadian registered portfolio manager, investment fund manager, exempt market dealer and in Ontario, a commodity trading manager.  Sun Life Capital Management (U.S.) LLC is registered with the U.S. Securities and Exchange Commission as an investment adviser and is also a Commodity Trading Advisor and Commodity Pool Operator registered with the Commodity Futures Trading Commission under the Commodity Exchange Act and Members of the National Futures Association. 

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

BentallGreenOak is a global real estate investment management advisor and a provider of real estate services. In the U.S., real estate mandates are offered by BentallGreenOak (U.S.) Limited Partnership, who is registered with the SEC as an investment adviser, or Sun Life Institutional Distributors (U.S.) LLC, an SEC registered broker-dealer and a member of the Financial Industry Regulatory Authority (“FINRA”). In Canada, real estate mandates are offered by BentallGreenOak (Canada) Limited Partnership, BGO Capital (Canada) Inc. or Sun Life Capital Management (Canada) Inc. BGO Capital (Canada) Inc. is a Canadian registered portfolio manager and exempt market dealer and is registered as an investment fund manager in British Columbia, Ontario and Quebec. 

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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