Beyond boundaries: The power of multi-asset credit investing

March 25, 2025

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The ability to allocate across geographies, sectors and sub-asset classes can offer investors the potential for compelling returns and diversified credit exposure inside a single portfolio, argues Mike McEachern.

Navigating complexity and ever-changing markets goes with the territory for investors. Even so, this year they are being confronted by a set of circumstances that could lead to a period of persistent uncertainty and potentially volatility.

Geopolitical tensions, shifting trade and tariff policies, and diverging economic trajectories across regions are causing pronounced uncertainty. Inflationary pressures remain a headache for central bankers, consumers and businesses, while governments face mounting fiscal headwinds.

When factoring in the addition of tight spreads to such a complex environment, it is reasonable to question the impact on single sub-asset class credit strategies. However, we believe multi-asset credit portfolios can help investors mitigate risk and capture opportunities through the careful assessment of relative value on a regional and sub-asset class basis.

Portfolio construction: Art meets science

Portfolio construction is an essential part of multi-asset credit investing, influencing returns, diversification and downside protection. Given such strategies allocate across a broad range of sub-asset classes, portfolio construction is designed to ensure exposures are balanced to optimize returns while managing risk.

A well-structured portfolio will look to dynamically capitalize on market inefficiencies, varying credit cycles and relative value opportunities. This can also help limit concentration risk, reducing vulnerability to a deterioration in any sub-asset class or sector. In our own multi-asset strategies, we construct portfolios through a careful blend of fundamental analysis, macroeconomic insights and quantitative tools.

Our approach to asset allocation is strategic and tactical. For the former, we consider the outlook for interest rates, credit spreads and economic growth trends. We then tactically adjust exposures to different credit asset classes based on shifting market conditions, seeking to smooth returns while limiting drawdowns and volatility. A disciplined approach is required to strike the right balance between yield generation, capital preservation and liquidity.

In terms of risk management, we utilise tools such as stress testing and concentration limits to build portfolios that will be resilient under different market conditions. Sell discipline is another critical element – allowing us to take profit on performing securities where we see little additional upside or to exit underperforming or deteriorating credits before they become significant liabilities.

Figure 1: A broad opportunity set

Source: Muzinich & Co analysis, not to be construed as investment advice. As of February 28th, 2025. Muzinich views and opinions. For illustrative purposes only.

Regional differences

A global multi-asset strategy can ‘go anywhere’ from a regional perspective, utilising a top-down view to identify and diversify into or away from opportunities that may be influenced by geopolitical and macroeconomic themes.

While credit spreads are universally tight, given the high level of absolute yields, there are signs of regional economic divergence – particularly between the US and Europe.¹  

Despite persistent inflation and pressure on certain parts of the US economy, including consumers, the outlook for the US is still relatively positive. As such, from a sub-asset class perspective, we are constructive on US high yield over Europe. As well as being largely domestically focused – and therefore less likely to be impacted by trade tariffs but more likely to be beneficiaries of Trump’s domestically-focused policies – the asset class is also supported by a strong technical (high demand chasing limited supply). Provided the US economy continues its current growth trajectory, we believe spreads could remain tight and yields attractive. 

Europe presents a different picture, although the market continues to perform irrespective of the macroeconomic and geopolitical picture (recent policy announcements on defence spending aside).²  While cautious, we have identified opportunities in countries that have not been ‘traditional’ investment choices.

After decades of dominance from export-centric, manufacturing-heavy Northern European countries such as Germany and France, Southern European economies now present a potentially attractive entry point given their service-led, domestically focused economies and relative political stability. Within the investment grade market, we see opportunities based on higher dispersion in these countries and spread premium over the US.

To varying degrees, emerging markets (EM) are likely to be affected by potential tariffs and volatility. However, the impact may not necessarily be negative and we believe an allocation into EM is warranted within multi-asset portfolios, even taking into consideration compressed spread premia versus the US in this part of the market. 

Export-oriented countries such as Chile, India and Brazil could all benefit from a stronger US dollar (weaker local currencies will improve the competitiveness of their exports). Commodity producers could also benefit from higher revenues. In the Middle East, we see opportunities in the AAA-rated UAE in real estate, ports, energy and transport, where bonds offer a significant spread pick up over comparable investment grade US assets.

Thoughtful on credit risk

A multi-asset approach goes beyond sub-asset classes or regions, however. It can also extend across and into sectors, which is where fundamental credit analysis can come into its own.

Banking has long been one of our favoured sectors given the extensive regulatory reforms post the Global Financial Crisis. Consequently, bank balance sheets have been significantly strengthened and are benefiting from credit upgrades. And yet many banks still offer a spread premium over the broader corporate market (Figure 2.)

Yet given the diverse types of bank debt within the capital structure, we can also rotate into different segments (Tier 2s, corporate hybrids, Additional Tier 1s etc) depending on where we see the best relative value – and where we look to protect portfolios during volatile periods.

While subordinated bonds are investment grade rated, their high-yield-type characteristics provide the potential for additional spread and yield without taking undue credit risk and/or volatility. We currently prefer short-dated Tier 2 bonds. 

The energy sector is comprised of numerous underlying sub-sectors based on the energy source and stage of production. Currently, we see opportunities in pipelines and transport across the US and EM.  

We also see value in certain investment grade automakers (in intermediate to short maturities).  Spreads have widened on the back of weak earnings (Figure 3), given the push into electronic vehicles has not been matched by demand, as well as the potential for tariff headwinds. However, we believe fundamentals remain sound, especially in the high quality, investment grade segment.

More broadly, limited dispersion between securities within the broader investment grade market is resulting in a lack of spread pick up between issuers, increasing the need for diversification and limiting concentration in terms of position size.

Higher quality at the long end

Given our bottom-up credit focus, we view duration positioning in the context of how spreads have performed. The recent flatness in spread curves means longer-duration bonds tend to be high-quality while short-duration bonds have higher spreads/credit risk (largely in the high yield segment).

As a result, we are taking a barbell approach and taking more credit risk at the front end. Coupon-clipping, higher spread holdings are concentrated in high yield (loans and short duration bonds) and higher-yielding BBBs, while higher quality and long duration investment grade bonds provide balance for duration and risk-off events. At the same time, we are underweight the lowest quality credits due to historically tight spread differentials.

The power of a global allocation

In a challenging and uncertain market environment, multi-asset credit portfolios offer a dynamic and flexible approach to navigating regional and sectoral divergences. By combining strategic and tactical asset allocation, rigorous fundamental analysis and disciplined risk management, investors can capitalize on relative value opportunities while mitigating downside risks.

Many of the moves within global credit tend to be quick and the opportunity set can be fleeting. A multi-asset approach allows the execution of a global allocation mix in real time as opportunities arise, while avoiding areas with unattractive valuations. Markets are rarely correlated to the same degree and the power of a multi-asset credit strategy is having the ability to rotate, change allocations and target opportunities while simultaneously managing risks.

Figure 4: Capturing and protecting returns across the economic cycle

Past performance is not a reliable indicator of current or future results.

Source: Bloomberg and Credit Suisse, as of February 28th, 2025. Indices selected are for regional comparison purposes, determined by Muzinich as follows: ICE BofA US High Yield Cash Pay Only Index (J0A0), ICE BofA US Corporate Plus Index (C0A0), ICE BofA European High Yield Index (HE00), ICE BofA Euro Corporate Index (ER00), ICE BofA High Yield EM Corporate Plus Index (EMHB), ICE BofA High Grade EM Corporate Plus Index (EMIB), S&P UBS Leveraged Loans Index (US Loans), S&P UBS Western European Leveraged Loans Index (Euro loans). Muzinich views and opinions. For illustrative purposes only. Not to be construed as investment advice. Diversification does not guarantee protection from loss. Index performance is for illustrative purposes only. You cannot invest directly in the index.

References

1.ICE Data Platform, as of 5th March 2024. ICE BofA US Cash Pay High Yield Index (J0A0), ICE BofA US Corporate Index (C0A0, ICE BofA Euro High Yield Index (HE00), BofA Euro Corporate Index (ER00), ICE BofA Global High Yield Index (HW00), ICE BofA Emerging Markets Corporate Plus Index (EMCB).
2.Euronews, as of 12th February 2025: European markets repeatedly reach new highs despite risks of a US-EU trade war.

 

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 March 2025 and may change without notice.

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Index descriptions

J0A0 - The ICE BofA US Cash Pay High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt, currently in a coupon paying period that is publicly issued in the US domestic market.  Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250 million.

C0A0 - The ICE BofA US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250 million.

HE00 - The ICE BofA Euro High Yield Index tracks the performance of EUR dominated below investment grade corporate debt publicly issued in the euro domestic or eurobond markets. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of EUR 250 million.

ER00 – The ICE BofA Euro Corporate Index tracks the performance of EUR denominated investment grade corporate debt publicly issued in the eurobond or Euro member domestic markets. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of EUR 250 million.

S&P UBS LLI - The S&P UBS Leveraged Loan Index is designed to mirror the investible universe of the $US-denominated leveraged loan market.

S&P UBS WELLI - The S&P UBS Western European Leveraged Loan Index is designed to mirror the inestimable universe of the Western European leveraged loan market.

EMHB - The ICE BofA High Yield Emerging Markets Corporate Plus Index is a subset of the ICE BofA  Emerging Markets Corporate Plus Index (EMCB) including all securities rated BB1 or lower.

EMIB – The ICE BofA High Grade Emerging Markets Corporate Plus Index is a subset of the ICE BofA  Emerging Markets Corporate Plus Index (EMCB) including all securities rated AAA through BBB3, inclusive.

EN00 -The ICE BofA Euro Non-Financial Index tracks the performance of non-financial EUR denominated investment grade corporate debt publicly issued in the eurobond or Euro member domestic markets.

EB00 -The ICE BofA Euro Financial Index tracks the performance of EUR denominated investment grade debt publicly issued by financial institutions in the eurobond or Euro member domestic markets.

EJAU - ICE BofA Euro Auto Group Index is a subset of ICE BofA Euro Corporate Index including all securities of Automaker, Auto Loan and Auto Parts & Equipment issuers.

Important information

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