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For several years, investors, from institutional to retail, couldn’t get enough of the tech stocks with all their promises of future growth. But now the market has spoken and it’s saying precisely this – valuations matter again.
Acronyms and credit: both have their peculiarities
The investment world loves its acronyms, even though, as the old gag goes, we should try to avoid TLAs (three-letter acronyms). Here’s a new one: the MAC, which stands for multi-asset credit. It’s a potential new path in the search for yield.
A client research note from global manager Eaton Vance Investment Managers – ‘Accessing Opportunities in Leveraged Credit’ – Â says that floating-rate loans and high-yield bonds are offering “pockets of opportunity”.
The paper argues that the two asset sub-classes can not only add value in a low-to-negative interest rate environment, they can also provide returns when interest rates eventually turn up.
“Investors looking to add strategically to this area may wish to consider standalone floating-rate and high-yield strategies, which can be especially attractive as complements to portfolios designed to substantially mirror major fixed- income benchmarks,” the paper says.
“Alternatively, they may wish to opt for a multi-asset credit (MAC) strategy, a one-stop solution that effectively delegates cross-asset allocation decisions to a single investment manager.”
Eaton Vance’s MAC strategy has a substantial allocation to leveraged credit, which serves as a convenient cornerstone for diversifying a traditional fixed income portfolio.
The manager believes that leveraged credit is currently priced well, with investors adequately compensated for risk, even factoring in an expected pick-up in corporate default rates. However, these securities have, thanks to a strong rally this year, moved closer to fair value.
“On a longer-term view, leveraged credit retains a strategic appeal for asset allocators. Its two sectors – floating-rate loans and high-yield bonds – occupy a special capital market niche,” the paper says.
“Relative to other income generating assets, their shorter duration characteristics and often higher yields mean that they can add value not only in today’s environment of low and negative yields, but also when interest rates eventually turn up.”
But the authors – Jeffrey Mueller, Justin Bourgette and John Redding – advise: “Investors and their advisers who are considering either standalone credit asset class strategies or MAC options need, as part of their due diligence process, to ascertain whether the investment manager offering the strategy has the requisite expertise in the underlying asset class or classes.”
AS a footnote, ‘The Economist Style Guide’, to which Investor Strategy News tries to adhere, says an ‘acronym’ has to be a pronounceable word, like ‘radar’, ‘nimby’ or ‘NATO’ – not just a set of initials, like ‘BBC’ or ‘IMF’. We argue that ‘MAC’ is a word as in ‘big mac’ or ‘Macintosh’ computer. ‘TLA’ is not.
