Episode 73

NOVEMBER 17, 2022

Rich & John on investing in multi-asset credit strategies

Rich Familetti, CIO of Total Return Fixed Income at SLC Management, and John Fekete, Head of Capital Markets at Crescent Capital, discuss the potential benefits of investing in multi-asset credit strategies in the current market environment.

Steve Peacher: Hi everybody, it's Steve Peacher, President of SLC Management. Thanks for dialing into this episode of “Three in Five.” I've got two people today that I’m really excited to have for this episode. Rich Familetti, who runs our total return fixed income team, and John Fekete at Crescent, who runs their capital markets business, which includes high yield bonds and loans and everything related to that. And together John and Rich run a multisector strategy for SLC Management. Guys, thanks for taking a few minutes.

Richard Familetti: Thank you.

Steve Peacher: So, first at a high level from an investor standpoint, why would somebody invest in a multisector product as opposed to just trying to do it on their own and investing separately in a, in a bunch of the different asset classes that you might combine into a into a multisector product?

Richard Familetti: Sure. So maybe I’ll start it, you know I think the strategic asset allocation in fixed income that we usually considers long term returns, correlations between asset classes, and you know sort of where we are in the credit cycle. You know our MAC strategy as a similar strategic view of the various asset classes we might invest in. Then, in addition, we have a tactical tilt on those on those asset classes based on the opportunity set that our various portfolio management groups see, and, and our views on credit markets. And so, fixed income sector correlations and returns can change quickly. And so, having professionals who can quickly identify security level opportunities that help drive our sector exposures, we think is very powerful.

John Fekete: I’d just add, Steve to what Rich said, that the world that we invest in today is just so much more interconnected than it used to be. So the need to be nimble and diversified is more important than ever. And I think we are empowered to make what I would call big picture decisions and balance the asset classes that that Rich noted to achieve an outcome, right? Whether it's we're going for capital appreciation or sustainable income or minimizing risk. We can do that. We've got a lot of levers to pull

Steve Peacher: A year ago there was really, you know, if you go back twelve months, there was very little value in the fixed income markets because rates were super low, spreads were really tight. A lot has changed. So, spreads in a very different place. People are, you know, a lot of macro concerns about inflation, about they've got the Fed raising rates, people worry about a recession. And so things are in motion. Where do you see value in the market today, in the sectors that you're looking at in this multisector strategy?

John Fekete: Like you said, everything looks pretty attractive compared to where we were a year ago. There's no question about that. There's a lot of opportunities to really dig in to. In the world I live in with high yield bonds and bank loans, we're seeing double digit yields in a lot of corners of those markets, which we haven't seen in a long, long time. We're also seeing opportunities and structured credit, especially CLO debt and equity. In fact, we’re looking today at some opportunities - investment grade, CLO debt tranches are offering mid-teens IRRs, and CLO equity even higher potential return. So there's a lot of opportunities that exist today. We know the markets don't feel great, but that's, it's precisely the time you want to be looking at these opportunities. And, you know, that's exactly what our focus is right now.

Richard Familetti: Yeah, I'd add two things to that. One is we feel like we, not only we have an edge in securitized and structured credit, but the liquidity discount at the moment for those sectors of the market is as big as it's been in the last few years. And in fact, our work suggests that having stress tests the asset quality underlying structure, a lot of the structure credit deals in various sectors versus the credit support that these deals provide, we feel like if you if you have any sort of reasonable investment horizon that's a great area to invest. If you're investments are well underwritten and the yields there are similar to a middle, middle to high quality, high yield. And then the other thing which is somewhat more boring but just interesting because of the absolute yield. In a short duration, short to intermediate duration investment grade corporate bonds actually look quite interesting here just given the absolute yield on them, right? So two- or three-year investment grade corporate bonds at six percent, is pretty unusual as a risk, reward/opportunity, and given its absolute yield.

Steve Peacher: You guys use a less liquid assets, as you refer to, in this product. And so, that means you’ve really got to manage liquidity at the same time you're trying to make tactical moves as relative values change in the market. So, talk about that in a minute. I mean, how do you manage portfolio liquidity given that you've got a mix of assets between liquid and illiquid. And how does that inter intersect with, or help or limit your ability to make tactical moves as you see relative value change in the market?

Richard Familetti: Maybe I’ll start. We do use private debt in the in the strategy, and we think it's an excellent diversifier versus public debt. Of course there's an illiquidity and sort of a complexity premium that goes along with the using that using private debt, but we think the benefits are significant in terms of   income added, versus, on a risk adjusted basis. We find that that with even with just a fifteen or twenty percent exposure to private debt the liquidity issues aren't that aren't that high, given that that we use quite a bit of public debt. And then, you know, in addition as a portfolio level view. We always carry two or three percent in cash for opportunities, or if we do have a need for liquidity. And then the one other thing that's interesting about our strategy is what we when we sometimes, when we switch between asset classes, instead of forcing portfolio managers to make liquidity decisions at times when they might not want to, we can use a bit of a derivatives overlay to make adjustments to sectors with, and then slowly move the underlying debt from one from one part of our strategy to another.

John Fekete: Just to add one quick thing to that is beyond the two to three percent cash that we normally have, we've got a pool of larger cap, more liquid investment grade assets that can be turned into cash on pretty short notice. And that segment of the portfolio can be a liquidity anchor and then allow us to invest in higher returning less liquid things like private fixed income and high yield bonds, which can be a return engine over the long term.

Steve Peacher: Well, I think I’m biased, of course, but I think this is going to be a great time starting this fall, probably for the next twelve to eighteen months, in the credit markets. Being able to move between sectors as values change, start rates, as a fed stops raising rates, as we see how the economy develops, and we see what happens with credit spreads. It's a great time to be uh, you know, for investors to be uh in these markets and look into this kind of product. So it's timely. Let me throw unrelated to the credit markets, you guys live on opposite coasts but you’re both Philadelphia sports fans. So, I have two questions that I’ll throw at you. Despite the fact that Philly's lost the World Series, you must have had some favorite moments of either the World Series or the play off. So what was your favorite moment in for the Phillies at the end of the season? And are the Eagles going to win the Super Bowl?

John Fekete: Well, I'll take the Eagles question. I'll let Rich take the Phillies, that's more heartbreaking. They certainly look great right, undefeated, expectations were not very high for the Eagles, very reminiscent of that 2017/2018 season when they kinda snuck in the playoffs caught everybody by surprise. And beat the Patriots, which I’ll never forget for the rest of my life, the first and only Eagle Super Bowl. So I feel very good about that, even four years later.

Richard Familetti: Well, I’ll start out by saying, even though I should speak about the Phillies I'll start by saying a couple of things about the Eagles: one they are favored to win the rest of their games according to the betting lines, which I take quite a bit of fear in, but they do look good all around, and so it's fun. They're certainly fun to watch. I'll just say, Bryce Harper's home run, you know, to basically seal the deal, was probably a highlight for me. But I watched all the games, my brother came around and we watched them, and it was fun while lasted, and we were happy to see them go so deep into the playoffs.

Steve Peacher: Well, that Harper home run was a special moment, and also the Schwarber home run that went like four hundred, and I don't know how many feet in, like a nanosecond, was also a pretty cool moment. And all I’ll say is that I been to one Super Bowl, and it was in Jacksonville when the Pats beat the Eagles, and the Eagles kind of gave it away at the end. All right, well, listen. This was a good conversation. Thanks, guys for taking the time, and thanks to everybody for listening to this episode of “Three in Five.”


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