The three pillars of Multi-Asset Credit at TwentyFour

The TwentyFour Multi-Asset Credit (MAC) strategy aims to maximise returns by allocating to a broad range of sectors across the global credit markets and dynamically targeting what it considers the optimum mix of credit assets as economic conditions change across the market cycle.

TwentyFour’s MAC strategy is focused on the more liquid end of the credit spectrum, allowing it to be daily dealt, which we believe is a key differentiator against the many monthly and quarterly dealt strategies in this space that tend to offer exposure to less liquid assets such as corporate loans and private credit.

Here, we explain how the strategy goes about targeting these returns with a three-pillar approach focused on income, relative value and differentiated alpha.

1. Income is the starting point

In fixed income, yield has been a strong predictor of longer-term performance. Looking at the last 40 years, across many different market cycles, starting yield has been strongly correlated with total return for a five-year investment period (see Exhibit 1).

That is why TwentyFour MAC’s primary objective is to maintain an attractive level of income at all times, with an important secondary objective of targeting capital gains where market conditions allow.

Put simply, the starting point is to keep the portfolio’s yield as high as possible, while seeking to avoid defaults to ensure the portfolio achieves that yield over the longer term. The managers seek to avoid defaults through specialist credit research and individual security selection.

Importantly, TwentyFour MAC does not use derivatives or other complex hedging strategies to drive returns or to lessen volatility. The strategy is long-only and high conviction; the approach is to look through short term volatility in higher beta credit sectors in order to try to maximise longer term returns.

2. Relative value is targeted through active management

Global credit is a broad and diverse investment universe that offers a full spectrum of risk, from investment grade (IG) corporates and financials through to high yield (HY) bonds and more complex fixed income securities such as corporate hybrids and bank capital.

Returns across these sectors can vary considerably from year to year (see Exhibit 2), which we think further underlines the importance of an active and flexible approach to diversify across the opportunity set and pivot portfolios towards more attractive areas of the market as conditions evolve.

TwentyFour MAC is managed on an active, unconstrained basis with no reference to traditional benchmarks. This unconstrained approach means the managers can quickly shift their allocation to different regions, countries and sectors, seeking what it considers the optimum mix of credit assets in an effort to maximise returns through the cycle.

In practice, this approach has produced a number of strategic allocation shifts since the strategy’s inception in November 2015 (see Exhibit 3):

1. An aging credit cycle and stretched valuations prompted the team to add liquidity through increased cash holdings and IG credit.
2. Consistent large allocation to banks, including Additional Tier 1s (AT1s), which offered a premium versus other credit.
3. After the initial period of the Covid-19 crisis, high quality IG corporate names in non-cyclical industries with good earnings visibility were added.
4. Later in 2020 and early 2021, increased allocation to European HY which the team thought offered better value than the US.
5. With questions over when and how severely the credit cycle might end, the quality of the credit portfolio was steadily increased.

3. Differentiated alpha is sourced from specialist sectors

To increase starting yield and potential return, TwentyFour MAC will typically hold meaningful allocations to more specialist areas of global credit, such as bank AT1 bonds and collateralised loan obligations (CLOs).

We believe these products in particular require detailed due diligence, but we find they often offer an attractive risk-return profile along with a complexity premium versus more mainstream areas of credit such as HY corporate bonds (see Exhibit 4).

TwentyFour has been a prominent investor in AT1s since the market’s inception in 2013, and healthy banking sector fundamentals mean the team continue to see compelling relative value opportunities here. CLOs meanwhile can offer both high yields and historically have a low correlation with broader credit markets, making them an attractive diversifier in our view. Dedicated asset-backed securities (ABS) strategies, which incorporate CLOs, form a substantial part of TwentyFour Asset Management’s business, and the TwentyFour MAC team collaborate closely with the firm’s experienced ABS team when building and changing their CLO exposure.

TwentyFour MAC’s typically higher allocations to these specialist sectors is expected to be a source of differentiated alpha versus comparable multi-asset strategies with a more traditional focus.

Targeting strong risk-adjusted returns in global credit

As we highlight above, we believe dynamically allocating to a broad range of sectors, including more specialist markets, is key to generating strong risk-adjusted returns in global credit.

Importantly, while TwentyFour MAC has a range of hedging tools available for mitigating specific market risks, derivatives are never used as a driver of returns; the strategy is long-only and expected to be “bond-like” in its behaviour.

The three-pillar approach described above enables TwentyFour MAC to target longer term returns in excess of HY bonds, but with a more diversified portfolio.