The Investec Multi-Asset Credit fund aims to deliver high-yield returns but with a lower volatility than investment-grade bonds. While this may seem like a tall order, its manager Jeff Boswell said this is only because investors often think of credit as a homogenous mass, ignoring the fact that it is made up of a range of sectors with extremely different behavioural characteristics.
To illustrate his point, he highlighted a table of the numerous fixed income sub-sectors showing that the difference in annual returns between the best and worst performers over the past nine years ranges from 9.2 to 64.9 percentage points.
Source: Investec
“Ostensibly you can have very similar credit risk which is priced quite differently in different credit markets and which will behave quite differently through volatility,” he explained.
Managing a multi-asset credit strategy allows Boswell (pictured) to benefit from the difference in returns between these sectors. However, he said this is “exceptionally difficult to do” from a top-down perspective
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Instead, he and co-manager Garland Hansmann look at it from the other end, asking themselves: “Where do we get best paid for a given level of risk?”
“So, say for a high-yield corporate, am I getting best paid in US high yield, the loan market, the short duration market or something to do with the crossover space? That is really how we construct the portfolio from a bottom-up perspective,” he said.
“And in our mind that allows you to capture a lot of benefit in terms of asset allocation, and it takes away or reduces that error rate from an asset allocation perspective.”
Investec Multi-Asset Credit is split into three individual building blocks, with the first one – “thematic idea generation” – possessing a more general objective in that it aims to benefit from secular trends and sector momentum.
However, the other two – “smart defensive positioning” and “positioning for upside” – have a more specific role in the fund’s objective of delivering high-yield returns but with a lower volatility than investment-grade bonds.
Hansmann pointed to Froneri as a good example of what it is trying to do in its “smart defensive positioning” block.
“This is a company that you probably haven’t heard of, at least not that brand name,” he said.
“But I am sure that most of you have consumed its products because it is the number two ice cream producer in Europe. So, if you go into any UK-based supermarket and buy its own-brand ice cream or any of the Nestle-branded or Green & Black’s ice cream, that is what it makes.”
The fund issued a direct loan to Froneri, then known as R&R, to fund the acquisition of Nestle’s ice cream business. It now has a market share in Europe of more than 25 per cent, just shy of Unilever’s 30 per cent.
“It is a company that is reasonably conservatively financed and only about 3x leveraged,” Hansmann continued. “You have senior secured access to the company’s assets if something should go wrong and you are getting paid above 3.5 per cent for that.”
While the managers believe getting this 3.5 per cent yield from such a stable company represents a good deal, this is not quite the high-yield returns of Libor+4 per cent targeted by the fund.
This is where the holdings in the “positioning for upside” section come in. Here the managers look beyond the income on offer, focusing more on the potential for an improvement in the credit rating to deliver some capital appreciation.
The most recent addition to this part of the portfolio is a bond in the Lycra Company.
“And you can guess what they make,” Hansmann continued. “But it is a very interesting proposition because again you are investing into something that is actually really quite niche.
“It is very specialised, so it has patents on the vast array of these specialty fibres and it is going into more and more of what we wear every day. So obviously we think of gym clothes and men on bikes, but actually more and more of this product is going into daily wear.
“So, if you think about the synthetic fibres that are going into everyday shirts and, then that is the sort of thing that they make. And it is really a growth industry.”
So, if the prospects for the Lycra Company are so positive, why isn’t everyone buying it? Hansmann noted that the bonds were issued to fund the acquisition of the Lycra Company by Shandong Ruyi Technology Group, which has two problems – first, its own credit rating “isn’t great”, and second it is a Chinese firm.
However, the managers analysed the bonds closely and decided the second of these factors in particular has led to a mispricing of its bonds.
“We analysed the kind of deals that regulators have spoken against and textiles was not one of them,” Hansmann continued.
“So, from that perspective, we felt very comfortable that the acquisition of Lycra, a US company by a Chinese company, would go through and after that you are actually in a company that has a very solid product, fairly low leverage but a high return because of that incremental risk.
“And as the market gets comfortable with that, that bond goes up in value. Then in addition to that Libor+5 per cent which you are getting anyway, you might get a little bit of capital appreciation. That might get you to Libor+6 or +7 per cent and then all of a sudden in combination with things like Froneri, you are getting to where you want to be.”
Investec Multi-Asset Credit has made 68.37 per cent since launch in July 2009 compared with 59.85 per cent from its FO Fixed Interest Global benchmark.
Performance of fund vs sector since launch
Source: FE Analytics
The fund is a Sicav domiciled in Luxembourg, but a mirror UK version, Investec Global Total Return Credit, was launched in May this year.
It is yielding 2.55 per cent and has annual management charges of 0.75 per cent.