And perhaps the most confounding question of all: How does one even measure “success” in such a heterogeneous investment realm, populated by a slew of often-dissimilar approaches that may have sharply divergent asset allocations, average credit qualities, and investment philosophies? For retail and institutional investors alike, trying to evaluate and compare strategies that reside within this domain can be a daunting exercise.

With these challenges in mind, we have built what we consider to be a robust framework for defining and measuring success in the MAC universe. It’s designed to help determine if a MAC option is indeed adding value in the manner intended by the portfolio manager, while avoiding misleading apples-to-oranges comparisons among different strategies. 

Defining Success: Four Drivers of Value-Add

Our approach to multi-asset credit investing targets a broad, predominately below-investment-grade (average BB/B rated) credit universe with asymmetric upside/downside capture metrics relative to global high-yield bonds or global equities.

The approach relies on four distinct drivers of value-add (FIGURE 1), which we think will resonate with investors in MAC strategies and provide a common language for articulating the primary levers of total-return generation. Most importantly, we believe these four drivers can serve as a basic (but powerful) “template” for defining and pursuing success in this vast, dynamic investment universe:

1. Simple diversification benefit: Historically, even a naïve, static blend of diversified, higher-yielding credit indices has been shown to outperform a single fixed-income market sector on a risk-adjusted basis over a full market cycle (FIGURE 2). Our goal is to meaningfully improve upon this simple diversification benefit.

2. Credit cycle calls: We adjust credit exposures (generally measured in spread duration or duration-times-spread) based on our forecasts for economic growth, monetary policy, and corporate leverage/defaults, alongside our view of what is already priced into credit spreads. This is a critical element of a MAC portfolio that seeks asymmetric upside/downside capture versus high yield or equities.

3. Credit sector rotation: We actively shift credit-sector allocations based on our changing assessment of where forward-looking return potential across credit sectors looks most attractive. The ability to be nimble in response to changing market conditions is key here.

4. Security selection: We also aim to capitalize on perceived security-level inefficiencies within the various credit sectors, collaborating closely with our specialist colleagues with deep expertise in their respective fixed-income sectors.

Measuring Success: Evaluation Benchmarks

In most investment universes, a generally accepted market benchmark provides a useful yardstick against which the performance and features of any strategy in the universe can be measured. Furthermore, it is fairly easy to make apples-to-apples comparisons with a broad universe of similar peer strategies. Neither is so simple in the MAC universe. One potential advantage of these strategies is that they are not constructed relative to benchmark indices, but this also compounds the challenge of measuring success. (See “The Benchmark Challenge” below.)

One potential advantage of these strategies is that they are not constructed relative to benchmark indices, but this also compounds the challenge of measuring success.

In fact, given the unique nature of the universe, one of the most frequent questions we hear from clients and consultants is whether or not to use a benchmark at all as a means of gauging success in MAC. Our answer is yes, but (importantly) only if it is the right kind of evaluation benchmark. Based on the four levers of value-add we use to define success (see FIGURE 1), we believe a MAC evaluation benchmark should ideally meet the
following criteria:

1) Reflect the simple (but potent) benefit of naïve, static diversification;

2) Provide a reasonable point of reference for credit exposures;

3) Be reflective of the strategy’s broad opportunity set; and

4) Be relatively easy to track over time.

Finding benchmarks that meet all four of these criteria in a space as heterogeneous as the MAC universe often requires turning to customized blends of indices. Specifically, we see real merit in using a blended evaluation benchmark that captures a MAC option’s entire investment universe and high-level risk characteristics (e.g., duration, spread duration). For example, many of our clients have opted to employ a blended credit index consisting of equally weighted allocations to high-yield bonds, bank loans, and emerging-markets sovereign debt to evaluate the performance of our MAC option.

We strongly believe this type of blend better reflects a MAC strategy’s diverse universe than do single-sector indices (e.g., global high yield) or diversified high-quality indices (e.g., the Bloomberg Barclays US Aggregate Bond Index), but without adding undue complexity. It also incorporates the inherent benefit of naïve, static diversification and has a sufficiently long effective duration (roughly four years), consistent with the structural role we believe duration should play in a MAC option.

While we view this blended evaluation benchmark as superior to other benchmark options, it is not perfect. For instance, it may exhibit more spread duration than is optimal from a credit-risk standpoint. It also contains significantly more EMD than we would consider “neutral” and leaves out certain sectors that lack investable indices (e.g., securitized credit). However, we believe it can be an objective reference point for measuring a MAC option’s success over time. It also gives clients a guidepost that is not peer-relative, minimizing the risk of making apples-to-oranges comparisons among MAC strategies.

Creating the Mosaic: Beyond Benchmarks

Of course, all benchmarks have their limitations. While a blended benchmark that fits the criteria we have laid out here can be an effective tool for measuring success, it should be just one of a whole “mosaic” of indicators (reference points) used to track the many ways that a MAC option is expected to deliver value for clients. Our mosaic also includes:

• Upside/downside capture metrics versus global high yield or equities;
  
• Risk-adjusted total returns versus credit indices focused on a single market sector; and
  
• Sector-level performance versus sector-specific benchmarks (to judge security-selection skill).

With enough insight into the mosaic, clients are often pleasantly surprised to learn that measuring success in MAC investing is less mysterious—and easier—than they first thought. Ultimately, it comes down to making sure your strategy has actually accomplished what it set out to do for you.