Systematic approaches to late-cycle credit investing

Nov 27, 2018

Executive summary

  • A significant challenge that investors face today is how to manage through transition points as the economic cycle matures.
  • As corporate debt levels continue to rise, the debate over what constitutes alpha and beta in credit has only grown hotter – from whether there exists a limit to diversification (AQR: “The Illusion of Active Fixed Income Diversification”) to whether the disqualification of persistent credit tilts as alpha is warranted (PIMCO: “When Alpha Meets Beta: Managing Unintended Risk in Active Fixed Income”).
  • We argue for an investment approach that distinctly separates alpha, smart beta, and beta, and takes advantage of the return dispersion that occurs late cycle.
  • We believe that this approach necessitates a quantitative approach to credit insights which seeks to optimize for alpha-beta separation and minimizes common factor risk, rather than an approach that relies on arbitrary cycle timing.
  • We apply systematic credit insights to two practical case studies: (1) credit screening in a long-only framework; (2) a credit investor’s approach to defensive equity investing in a multi-asset framework.
Tom Parker, CFA
Chief Investment Officer of Systematic Fixed Income
Mr. Parker is responsible for all portfolio management and research as well as portfolio construction across the Systematic Fixed Income platform
Chad Meuse
Portfolio Manager, Head of Equity and Capital Structure, Systematic Fixed Income
Shawn Steel, CFA
Senior Product Strategist, Systematic Fixed Income
Kathryn Donovan
Product Strategist, Systematic Fixed Income