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Treasury and credit markets continue to be highly volatile, with inflation, aggressive central bank action and recession fears dominating headlines. However, we continue to take advantage of market volatility though security selection and relative value trading.
“Markets expect that Fed tightening will hammer activity and force it to relent next year. Meanwhile, the Fed’s view is that rightsizing demand with labor supply will be a slog but with patience and restrictive rates it can deliver a soft landing.”
| Neutral Mix | November 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% |
| November tactical allocation |
October tactical allocation |
| 10% | 10% |
| 25% | 25% |
| 15% | 15% |
| 23% | 23% |
| 12% | 12% |
| 15% |
15% |
Treasury and credit markets rallied in November as the CPI print came in lower than expected, suggesting that inflation may have peaked. This year, markets have been dominated by the threat of persistently high inflation and the Fed’s aggressive rate hikes to contain it. As we enter 2023, we expect markets to focus less on Fed policy, as its set to pause, and more on the growth outlook. That allows portfolio managers to differentiate their performance through diligent security selection rather than just top-down macro positioning. We are already seeing more dispersion in spreads and risk premiums across markets, a sign that asset and credit fundamentals are starting to drive valuations rather than just inflation uncertainty and rate volatility.
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.
Across high yield, we believe high yield will deliver an attractive return, thanks to the starting yield of 8.6%.1 In the course of 2022, we have favored loans over bonds. As the Fed hikes rates, floating rate loans have outperformed fixed rate bonds this year. However, as rate increases level off, the tilt between loans and bonds will become more of a credit call. We expect next year’s credit defaults to be in line with long term averages. But with loans slightly higher than bonds. Low issuance and maturities provide price support for high yield.
SLC Management multi-asset credit strategy – summary guidelines |
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| 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 |
1ICE BofA U.S. High Yield Index as of 9/30/2022
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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