Multi-asset credit strategies are coming into their own of late as ways to provide yield for investors, with little or no correlation to the fully priced equity market and, potentially, with little or no interest rate duration risk. Sound too good to be true?
Well, it’s not as simple as that, of course, but in theory at least multi-asset credit (MAC) portfolios can do each of those three things. And in the current global economic environment they are welcome attributes for any portfolio addition.
CQS, the London-based global credit manager founded by Australian-raised Sir Michael Hintze, looks to address interest rate sensitivity, equity market correlations and liquidity through its long-only MAC strategy.
Largely because of Hintze, a regular visitor to Australia, and his old university friend and former Australian representative, Paul Chadwick, CQS has a strong presence locally. The firm set up its own office in January this year, with Louise Watson, formerly a business development manager at Challenger International, as head of distribution.
Globally, CQS manages about US$13 billion in a range of alternative, long-only and bespoke vehicles. The firm was founded in 1999 and launched its first fund in 2000. It has a range of strategies across the returns spectrum, from the flagship ‘Directional Opportunities Fund’ through to long-only, absolute return, and fixed-income strategies. Single-sleeve strategies are available in loans, high-yield bonds, investment grade bonds, ABS and convertible bonds.
Craig Scordellis, the head of long-only multi-asset credit at CQS, said on a visit to Australia last week that investors liked the fact that they could embrace a dynamic environment and broader opportunity set through MAC.
The last seven-or so years had seen the breadth and depth of credit markets expand significantly, he said, increasing the credit opportunity set for investors. Meanwhile challenges to liquidity, driven by regulatory changes, were increasing relative to value opportunities.
“Institutional investors want credit, visible and predictable income streams, and de-risking to meet liabilities. But they also need some yield,” Scordellis said.
“Thanks to low yields in European investment-grade bonds and US investment grade being an asset class with generally long duration, there is a danger in a potentially rising rate environment.”
If you go back to 2013, fund managers were well paid to invest in European credit, off the back of issues surrounding ‘Grexit’ (the possibility of Greece exiting the EU) and general EY disunity. Subsequently there was a reversal; globally as the US experienced a default cycle because of the slump in oil prices.
“That created opportunities,” Scordellis said. “Now, the market is a bit more balanced.”
CQS believes in the consensus view that US rates will rise soon and the ECB will become increasingly “hawkish”. Therefore, it favours floating-rate loans and short-duration securities. The manager expects further geopolitical events to result in continued market volatility.
“We lend to the right businesses that will be sustainable through various government policy changes,” Scordellis said. “We are asset managers with the ability to use hedge fund capabilities.”
Like many such managers, CQS eschews the term “hedge fund”, in favour a description of its underlying strategies. What was a common theme for the firm’s portfolio managers, Scordellis said, was the search for alpha and the exploitation of opportunities in fixed and floating rate interest securities.
Greg Bright is publisher of Investor Strategy News (Australia)