Fund Profile: TwentyFour Sustainable Multi Sector Credit

What is Sustainable Multi-Sector Credit?

The TwentyFour Sustainable Multi-Sector Credit Fund is a fixed income fund that aims to boost returns by investing in a wide range of global credit instruments with a longer term investment horizon, supported by a robust ESG framework.

What is the investment strategy?

The TwentyFour Sustainable Multi-Sector Credit Fund is actively managed, flexible and unconstrained; its managers have the mandate to go anywhere in global credit markets as they look to maximise returns for investors, allocating to different regions, countries and sectors as economic conditions evolve, seeking the optimum mix of credit assets at every stage of the cycle.

The approach is also high conviction; typically the portfolio only holds around 150 line items, allowing the team to monitor each security closely and ensuring each position has a meaningful impact, unlike many so-called active strategies that have so many positions they end up looking like the benchmark.

As fixed income specialists, we can target a range of high yielding assets not found in more traditional bond portfolios, such as secured credit and asset-backed securities (ABS), collateralised loan obligations (CLOs), corporate hybrids and subordinated bank debt.

What can it offer institutional investors?

The TwentyFour Sustainable Multi-Sector Credit Fund has been designed primarily to meet the needs of institutional investors such as pension schemes, which have longer term investment goals and are therefore more suited to riding out the short term volatility associated with higher yielding or less liquid credit assets in pursuit of higher returns.

The fund is monthly rather than daily dealt, which gives the managers scope to look through short term volatility and liquidity requirements in favour of targeting long term performance. The team’s highly selective approach means they will look to capitalise on individual credit stories they like by holding most positions to maturity while seeking to maintain a high level of income.

The fund also addresses institutional investors’ growing desire to see their capital invested sustainably, with a carefully calibrated mix of positive and negative ESG screening that our research has shown does not compromise overall returns. The sustainability overlay begins with a negative screen which rules out various ‘sin’ sectors, but then importantly adds a positive screen which excludes any bond issuers we score lower than 34 out of 100 . This actively rewards those issuers in the top half of the ESG distribution, helping to ensure clients’ capital is being invested responsibly while still benefiting from TwentyFour’s specialist and active approach to fixed income.

How are we responding to today’s market conditions?

Markets are facing a persistent period of uncertainty, primarily driven by a lack of clarity over the future path of monetary policy in key jurisdictions such as the US, Europe and the UK. Added to this we have growing fears of recession amid soaring inflation and global supply chain disruption, not to mention a volatile geopolitical backdrop. As a result, it is unsurprising that credit spreads have widened aggressively over the course of 2022 so far. 

This continued uncertainty means we continue to favour shorter credit spread duration, which makes a portfolio less sensitive to interest rate changes. However, we have recently added some longer-dated Treasuries to provide greater balance and lock in some higher, risk-free yields. Likewise, while a recession in the short term is not our base case, we have moved up the ratings curve to increase the portfolio’s overall credit quality. 

That said, market participants have priced in a lot of bad news. Valuations in some sectors have reached levels ordinarily experienced amid a recession, with spreads in many sectors now above their long term averages. At present, we believe investors should be avoiding those businesses with lower pricing power that are less able to pass on their increased input prices to consumers. By contrast, we think banks are in a solid position to weather further volatility, given robust balance sheets observed in the sector, with investors well compensated for holding bank debt. Likewise, floating rate assets such as European ABS still have a part to play in protecting against persistent inflation. We are also maintaining high liquidity levels in the portfolio to provide flexibility and the opportunity to take advantage of relative value switches. Finally, despite wider spreads looking more attractive, we currently believe emerging markets will come under further pressure due to ESG concerns.