Acadian Makes a Case for Systematic Public Credit
Private credit is all the rage this year, but public debt yields are up, too, especially relative to the risk, according to a new paper.
Much has been written this year about opportunities in private credit. Acadian, the $100 billion asset manager, is reminding everyone not to forget about good, old-fashioned corporate credit — with a strict formulaic twist.
Since the global financial crisis, outstanding U.S. public corporate debt has tripled to $10.6 trillion, or about one-fifth the size of the nation’s equity market. The market isn’t just bigger, it’s better, Acadian said in research published Tuesday: There are more participants and bonds issued, trading is increasingly electronic, data has improved and, as a result, there is greater liquidity and transparency.
Corporate credit is always appealing, to be sure, largely for its risk premium. But it’s especially attractive right now. “The corporate credit market’s evolution has brought new attention to this distinct asset class along with new opportunities for investors,” Acadian said.
Institutional investors overwhelmingly allocate money to active corporate credit managers and expect a risk premium rather than incremental returns. Investors should consider systematic strategies, too, Acadian argues.
Corporate balance sheets are strong, interest coverage ratios are at or above multidecade highs, and the net-debt-to-Ebitda ratio for the median high-yield-rated company is at a 10-year low, according to Acadian. The outlook for the debt is good.
“These conditions are a byproduct of the low interest rate environment from late 2020 to early 2022, which incentivized companies to issue debt and lock in favorable financing costs,” the firm said in its report. “In contrast, floating rate debt in the private credit and bank loan markets have led to higher interest expenses, which could increase the number of defaults and restructurings.”
Systematic active credit strategies are a compelling way to invest in that debt, either on a standalone basis or to complement traditional discretionary allocations, according to Boston-based Acadian.
Discretionary credit strategies dominate the market and Acadian doesn’t think investors should abandon all of them. But it contends that most credit managers are in essence taking sector or ratings bets, or market timing, which is different from what systematic strategies do.
“Even in cases where the investment approaches of discretionary credit managers are philosophically aligned with systematic concepts, e.g., seeking bonds with attractive spreads from high-quality issuers, they likely employ different metrics of relevant characteristics, including measures of default risk,” Acadian said in the paper. “For these reasons, systematic and discretionary allocations can sit naturally with one another in a portfolio.”
Systematic investing also simply hasn’t taken off in fixed income because it’s more difficult to do than with stocks. “Two guys and a spreadsheet” doesn’t work for systematic approaches in credit markets, said Scott Richardson, head of systematic credit at Acadian. The strategies require multiple people skilled in building the inputs for the models and the platform to ensure proper liquidity in primary and secondary markets.
Richardson estimates that’s partly why only $120 billion of the $10.6 trillion credit market is managed systematically.
“Few asset managers and asset owners have the scale and knowledge to be successful here. Credit markets are poised for disruption. With the continued improvement in data access and data quality and continued development of electronification trading, systematic approaches are uniquely suited to capitalize on this disruption,” Richardson said.
Not every manager will have the infrastructure and talent to build those systems, at least immediately. And electronic trading in public credit markets continues to improve but firms still have to choose which bonds to buy.
“As time passes, the direction of travel will make it easier to be systematic in credit, but not easy,” Richardson said.