14 September 2021
August 2021 - Relevance of Multi Asset Credit (“MAC”) in a Post COVID-19 World - Fund Manager's Comments
Abundant liquidity and economic growth feeding the search for yield
Credit markets performed particularly well so far in 2021, driven by encouraging COVID-19 developments, supportive monetary policy and positive fund flows. With a medium-term view and particularly for investors seeking income, credit markets offer attractive opportunities at current levels.
Despite the uncertainty that still lies ahead, macroeconomic recovery will likely continue in 2022, albeit at a more moderate pace, and fiscal policies are unlikely to shift to austerity soon. As recently signalled by the Fed, continued support from monetary policies will be needed to restore jobs lost during the pandemic and prevent unwarranted financial conditions tightening, helping to maintain the cost of servicing debt at affordable levels. Defaults are back to historical lows and we do not expect a new spike soon.
High Yield Bonds Default Rate
Source: JP Morgan, as of 31.08.2021
In this environment dominated by abundant liquidity, the search for yield will likely dominate fixed income asset allocation as the ultra-low rates environment continues, supporting further spread compression amid excess liquidity channelled into credit markets. The following chart shows the evolution of the total negative yielding debt globally.
Total Global Negative Yielding Debt
Source: Bloomberg, as of 31.08.2021
We believe that a flexible and active investment strategy is best placed to navigate through these market conditions. A MAC approach seeks to allocate tactically across credit asset classes to produce consistent and stable returns, with lower downside risks during periods of volatility. This flexibility allows RAM’s credit team to access higher-yielding exposures, while managing risk by diversifying across different credit segments. Each credit sector requires different skill sets and expertise and a MAC approach offers an efficient way for investors to access credit markets.
RAM AI onboarded a credit fund fully hedging out interest rate risk
RAM has recently added a new fund to its offering, PALLADIUM FCP – RAM Mediobanca Strata UCITS Credit Fund (“Strata”), launched in May 2019. Strata is a long-biased fund actively managed without reference to a benchmark, with exposure to predominantly developed market credit positions. It is actively managed and allocates dynamically to four credit asset classes (ABS, Corporates, Financials and Structured Credit) depending on the relative attractiveness of available opportunities. Strata importantly will hedge currency and interest rate exposure, offering investors pure credit spread returns with no influence from yields’ volatility.
Looking towards the future, we continue to see plenty of opportunities for alpha generation in credit markets, and we stand by our conviction that a dynamic, unconstrained approach to credit investing is the best way for investors to deal with the current environment and leaves us confident in our ability to deliver on our investment objective, despite low market yields.
Overview of PALLADIUM FCP – RAM Mediobanca Strata UCITS Credit Fund:
- AUM: €303m
- Well balanced and diverse sources of return
- Low correlation of returns between credit asset classes
- Not constrained by a benchmark
- Interest rate and currency exposures are hedged
- Dynamic investment process with both a top-down and bottom-up approach, improving the possibility of extracting value in changing market environments
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