Capital at risk. The value of investments and the income from them may fall as well as rise and is not guaranteed. Investors may not get back the full amount invested.
Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
Dynamic Credit Income strategy* (DCI) is designed for investors seeking outperformance in rising credit markets without taking excessive risks. To achieve this:
We focus on maintaining a high level of portfolio yield throughout the credit cycle, while searching for opportunities presented by dislocated markets.
The portfolio combines macro analysis with Muzinich's traditional focus on bottom-up credit selection. We first aim to identify rising and falling trends across the credit universe and then leverage the experience of our 30-person global credit research team to find the names that best reflect these trends. The portfolio will be actively positioned depending on where we are in the credit cycle and will have additional flexibility to be fully invested even in dislocated markets with the aim to generate a higher long-term return at the cost of higher volatility. The investment team will be able to hold credits through mark-to-market volatility hence the focus on thorough bottom-up credit research. The use of hedging to dynamically adjust the beta of the portfolio's overall credit exposure while remaining invested will be utilized to help limit drawdowns during market dislocations. The strategy will also benefit from comprehensive ESG integration, socially responsible exclusions and a carbon efficiency target and will qualify as an article 8 product under the EU Sustainable Finance Disclosure Regulation.
Michael McEachern is the lead portfolio manager and responsible for the asset allocation and risk management. He is supported by Co-Portfolio Managers Brian Nold and Warren Hyland. Another 6 portfolio managers provide individual credit selection. The investment team has an average of over 20 years industry experience.
How are you positioning your portfolio for the rest of the year and looking ahead to 2022?
The DCI model portfolio is currently positioned (as of the end of December) with a higher yield (3.92% vs 3.79%) and lower duration (4.39 vs 4.94) than the reference index (70% BB/B & 30% BBB)¹. Beta is neutral to the index at 1.0x with a range during 2021 as high as 1.3x and a low of 0.96x. The CDX HY index hedge was originally established in August and grew to (10%) and was reduced to the current (5%) position at of the end of November.
The model portfolio is slightly overweight high yield globally with an overweight position in single B versus underweight BB. By asset sleeve, the portfolio is overweight emerging markets (EM) at 22% vs the index at 16% with an overweight EMIG versus an underweight in EMHY. DCI is underweight EUIG but more neutrally positioned when factoring in the portfolio's CLO allocation. In the US, the portfolio is underweight IG and slightly overweight HY.
Entering 2022, we expect yield will remain an important driver of return. We also remain vigilant regarding the potential for volatility which could create additional buying opportunities given the strong fundamental backdrop.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
Given the backdrop of continued strong fundamentals and generally improving balance sheets, the DCI model portfolio has allocated close to 10%, or between 20-25% of the USHY allocation, of the model portfolio to a "Rising Star" theme. These are highly rated HY credits which we believe are upgrade candidates to IG over the next 6-18 months. Upon eventual upgrade, we believe these credits can experience attractive upside price convexity given additional spread compression potential.
Another thematic opportunity remains the "Reopening Theme" which represents around 10% of the model portfolio across the global sleeve allocations. The thematic basket, which offers attractive yield, is comprised of a combination of airlines, cruise lines, shipping, and leisure allocations in credits with strong liquidity and competitive positions to weather the potential for additional reopening related volatility.
By sector as of the end of December, the DCI model portfolio is overweight cyclicals, banking, diversified financials and communications. Underweight sectors include utilities, energy, capital goods, technology and basic industrials.
¹Reference index: 70% of HW40 - ICE BofA BB-B Global High Yield Index. 30% of GBC4 - ICE BofA BBB Global Corporate Index. The reference index and the weight assigned to each of its two component indices seek to represent the proposed strategy's targeted investment universe (both developed and emerging market corporate securities with investment grade and below investment grade ratings) and how the strategy will typically seek to achieve its income and capital appreciation objectives.
*The proposed Strategy has not been launched, all objectives, targets and characteristics are subject to change. No legally binding terms shall be created until definitive documentation is executed and delivered. The above information is based on a model portfolio and no actual investments have been made. There is no guarantee that once launched the portfolio will invest in the same way as described above. The proposed strategy will be actively managed and may at times seek to make investments outside of the targeted universe represented by the reference index.
SFDR - Refers to Regulation (EU) 2019/2088 or the Sustainable Finance Disclosures Regulation (SFDR) a piece of European financial sector regulation which sets out obligations for financial market participants to disclose specific details on their approach to sustainability risks in their investment process and other details on the provenance of ESG claims that are used to market their financial products. Further details on Muzinich's SFDR disclosures are available in relevant product documentation such as fund prospectuses and supplements on our website www.muzinich.com
This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co are as of 31 December 2021 and may change without notice.
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This material relates to a strategy that has not yet been launched and so all characteristics, timelines and objectives are subject to change and there can be no guarantee that they will be achieved or followed. This document is for informational purposes only and does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such. To the extent any strategy described herein is offered in a pooled vehicle, interests in the pooled vehicle will be offered only through its offering documents, which would describe the vehicle's investment strategy and risks of investment in more detail. To the extent any such strategy is offered in a separately managed account, the exact investment guidelines and restrictions would be included in an investment management agreement. The material in this presentation is directed only at entities or persons in jurisdictions or countries where access to and use of this information is not contrary to local laws or regulations.
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Portfolio characteristics and performance of the representative account(s) reflected herein may not be fully representative of other Global multi-asset credit portfolios Muzinich manages.
Risk management process includes an effort to monitor and manage risk but does not imply low risk.
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This discussion material contains forward-looking statements, which give current expectations of a strategy's future activities and future performance. Any or all forward-looking statements in this material may turn out to be incorrect. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Although the assumptions underlying the forward-looking statements contained herein are believed to be reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurances that the forward-looking statements included in this discussion material will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Further, no person undertakes any obligation to revise such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
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