MULTI ASSET CREDIT For professional investors only, not suitable for retail investors
After 30 years of falling yields, investors are increasingly looking beyond the traditional focus on investment grade credit as they look to generate attractive returns. In a volatile environment with risks on the rise, finding a diversified solution with the potential to withstand a broad range of economic and market scenarios will become critical. Multi asset credit (MAC) is a potential solution to this problem. By combining assets from across the credit universe, Royal London Asset Management (RLAM) believes that investors can enhance returns in a risk-controlled way. ROYAL LONDON MULTI ASSET CREDIT FUND Building on the proven success of our existing credit capabilities, RLAM has developed a MAC proposition to meet client demand for greater diversification of credit in a low yield environment. We believe that RLAM s MAC strategy is well-suited to the needs of pension schemes in terms of diversification, risk/return and liquidity profile. The Fund will seek to deliver a total return in excess of cash (3 month LIBOR) plus 4-6% per annum, over rolling three year periods. Key fund features Benchmark 3 month LIBOR Launch date 3 July 2017 Objective The investment objective of the Fund is to generate a total return from a globally diversified portfolio of credit instruments Duration 1-5 years Liquidity Daily* Target** 3 month LIBOR + 4 to 6% p.a. over rolling 3 year periods Investment universe Global high yield Global investment grade Asset backed securities Loans / FRNs Emerging market debt Flexibility to consider Cash Global sovereigns Derivatives*** *Dealing is daily, but we require 20 business days notice for redemptions. **There is no guarantee that the Fund will achieve this result over this or any time period. Capital invested in the Fund is at risk. ***Derivatives will only be used within the Fund as a risk mitigation tool. Interest rate derivatives may be used to manage the duration within the Fund. Credit derivatives may be used for downside protection and to mitigate market risk.
WHERE DOES MAC INVEST? The credit universe can be broadly split into three streams: traditional, alternative and illiquid. Traditional credit includes sovereign debt and investment grade corporates; alternative credit includes high yield, loans and Asset Backed Securities (ABS); while illiquid credit offers the potential for strong long-term returns through distressed debt and speciality finance. These asset types outlined above have a range of characteristics and their performance varies under different market conditions. Including a blend across these can be advantageous in managing risk and return. The Fund will invest in the traditional and alternative streams. Asset Allocation 18% 35% Loans 4% Secured High Yield Developed Market High Yield Emerging Market High Yield Asset Backed Securities 24% 19% Source: RLAM as at 31 March 2017. For illustrative purposes only, positioning may vary over time. The role played by each of the key asset classes is outlined below: Loans The barriers to entry and scale of the loans market mean that they provide a breadth of valuation opportunities. The Fund will focus primarily on senior secured loans with structures that the Manager believes will prove resilient in challenging conditions. The security levels associated with loans means that recovery rates tend to be higher. Their short duration also infers lower default rates and volatility, as well as reduced sensitivity to interest rate movements. Global High Yield In addition to offering enhanced income potential, global high yield bonds offer exposure to a broad range of sectors and industries, including assets from across developed, emerging and secondary markets. We believe that the best opportunities are identified by utilising our experience of investing in global high yield markets, and not just specific geographical regions. Asset Backed Securities Again, RLAM has considerable experience within this area and one of the central tenets of our investment philosophy is a focus on the covenants, structure and security of the assets in which we invest. We emphasise credit research as a key means of understanding the assets in which we invest, giving us confidence in our convictions.
INVESTMENT PHILOSOPHY The Multi Asset Credit Fund s investment philosophy is based on two principal beliefs which serve as the foundation for idea generation, execution and portfolio construction. 1. Credit markets are inefficient: We place an emphasis on security as this is undervalued by the market. We believe that liquidity and volatility are mispriced. 2. Credit sub-sectors have own cycles: We believe that a top-down strategic perspective combined with individual security analysis will create a portfolio comprised of assets across multiple sub-sectors, strengthening the credit quality of the fund and reducing volatility and asset correlation. RLAM s Multi Asset Credit philosophy IDEA GENERATION EXECUTION Credit markets are inefficient...active stock pickers Prioritise perspective over coverage...focused, expert and nimble co-located team Multi Asset Credit Credit sub-sectors have own cycles...within a strategic framework Construct directly invested portfolios...enables superior risk management The consequence of our belief in credit market inefficiency is that we prioritise perspective over coverage. In an information rich global market, we believe it is more important to be expert and nimble in idea generation and decision making than to attempt generic market coverage with no edge. We believe that our focus on credit cycles leads to better risk management. Focusing on credit fundamentals across countries and sub-sectors leads to discerning stock selection and a more transparent view of the risks undertaken in the portfolio.
INVESTMENT PROCESS The investment process combines our top-down and bottom-up approach to construct a portfolio of best ideas. The investment process can be summarised into three key steps: 1. Macro view 2. Risk overview 3. Stock selection MACRO VIEW At the macro level, our analysis starts with a quarterly economic review which covers all major economic regions and focusses upon key variables such as growth rates and inflation. This meeting is also used to formulate our outlook scenarios, including long-term default, yield and interest rate forecasts which help to shape our investment strategy. We then combine this with the team s analysis of the credit cycle. We believe that different parts of the credit universe have differing characteristics and will perform differently under different conditions, as illustrated below. Credit cycle Benign growth 2004-2007 EMD Secured high yield Late cycle 1998-2002 2014 Secured high yield loans INTEREST RATES Recovery 2003-2004 2009-2014 Unsecured high yield Retreat/recession 2002 2008-2009 Sovereigns/ investment grade DEFAULTS Source: RLAM as at 31 March 2017 RISK OVERVIEW Being conscious of risk management, within investment construction we look to diversify the Fund s holdings by sector and regions. We will also tilt holdings toward the areas where we believe the greatest risk/return attributes can be found. We overlay certain thematic strategies, for example, by removing companies where we believe that business models cannot be forecast or an avoidance of certain unfavourable creditor jurisdictions. We also exclude bonds which do not match our volatility, yield and liquidity characteristics. STOCK SELECTION The last and most important filter is fundamental credit selection on a bottom-up basis this is where we believe we can add real value, by looking at company fundamentals to identify strong, versatile investments.
EXPERIENCE AND EXPERTISE The MAC Team is led by Azhar Hussain, who is supported by Fund Managers Khuram Sharih and Stephen Tapley and Analysts Sebastien Poulin, Tom Eliot and Gary Ewen. The team has extensive experience of investing across all parts of the global credit universe. Azhar Hussain Head of Global High Yield Azhar Hussain joined RLAM in May 2012 as Head of Global High Yield. Azhar has 21 years experience of the financial industry. Before joining RLAM he was at Insight Investment Management as Head of High Yield and Leveraged Loans, and manager of a number of high yield credit funds. Prior to Insight, he worked at Gulf International Bank (GIB) in London, specialising in global high yield. He joined GIB in 2001 as an analyst, before assuming his first portfolio management role two years later and subsequently establishing a high yield team. Azhar began his career at Deloitte & Touche in 1996, where he qualified as a Chartered Accountant. Azhar has a BA in Economics and Law from the University of London (School of Oriental & African Studies). Khuram Sharih Fund Manager Khuram Sharih joined RLAM in August 2016 as a Fund Manager, focusing on leveraged loans and alternative credit. He joined from Newton Investment Management, where he worked with their fixed income and global multi-asset teams. Khuram was previously at Cairn Capital, Denali Capital and JP Morgan in the US. Stephen Tapley Global High Yield Fund Manager Stephen Tapley joined RLAM in 2012, Stephen has nine years of experience investing in Global High Yield Bonds. Stephen started his career at Gulf International Bank, analysing US and European High Yield companies and was also involved in setting up the Emerging Market Opportunities Fund. He then moved onto Scottish Widows as a European High Yield analyst where he became a CFA Charterholder. Stephen holds a BEng in Mechatronic Engineering and an MSc in Financial & Industrial Mathematics, both from Dublin City University. Sebastien Poulin Senior Credit Analyst Sebastien Poulin joined RLAM in August 2016 as a Senior Credit Analyst with a remit split between high yield and leveraged loans. Sebastien joined from Principal Global Investors where he held a similar role. Sebastien has also worked at Newton Investment Management, Standard & Poor s and BNP Paribas.
KEY POINTS Diversification The Fund increases the credit opportunity set by investing in diverse credit sectors including global high yield, asset backed securities, loans, floating rate notes (FRNs), emerging market debt, convertible bonds and global investment grade bonds. High income The Fund offers increased exposure to higher yielding segments of the credit market through relatively liquid investments, which may be beneficial in a low rate environment. Duration The Fund has a shorter duration which could offer protection from any increase in volatility or rise in interest rates. Streamlined solution Outsourcing asset allocation to one manager with the objective of providing through the cycle returns could be efficient from a governance perspective. Established approach The Fund will follow the same investment philosophy and team approach that RLAM apply to our other actively managed credit funds.
Contact us For more information about this Fund or RLAM s range of products and services, please contact us. Royal London Asset Management 55 Gracechurch Street London EC3V 0RL Tel: 020 7506 6500 Fax: 020 7506 6796 Email: institutional@rlam.co.uk Website: www.rlam.co.uk For professional customers only. The views expressed are the author s own and do not constitute investment advice. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Unlike the income from a single fixed income security, the level of income (yield) from a fund is not fixed and may go up and down. Sub-investment grade bonds have characteristics which may result in a higher probability of default than investment grade bonds and therefore a higher risk. For funds that use derivatives, their use may be beneficial, however, they also involve specific risks. Derivatives may alter the economic exposure of a fund over time, causing it to deviate from the performance of the broader market. Financial promotion issued by Royal London Asset Management July 2017. Information correct at that date unless otherwise stated. Royal London Asset Management Limited, registered in England and Wales number 2244297; Royal London Unit Trust Managers Limited, registered in England and Wales number 2372439. RLUM Limited, registered in England and Wales number 2369965. All of these companies are authorised and regulated by the Financial Conduct Authority. All of these companies are subsidiaries of The Royal London Mutual Insurance Society Limited, registered in England and Wales number 99064. Registered Office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Asset Management Investment Funds ICAV is an umbrella company with segregated liability between sub-funds, authorised and regulated by the Central Bank of Ireland. Registered in Ireland number C164829. Registered office: 70 Sir John Rogerson s Quay, Dublin 2, Ireland. The marketing brand also includes Royal London Asset Management Bond Funds Plc, an umbrella company with segregated liability between sub-funds, authorised and regulated by the Central Bank of Ireland, registered in Ireland number 364259, and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. Registered office: 70 Sir John Rogerson s Quay, Dublin 2, Ireland. Our Ref: BR RLAM PD 0003