The past decade has been supportive of traditional fixed-income strategies, with bond yields declining to historic lows amid a period of concerted expansionary monetary policy. But today, these kinds of strategies are expected face a less hospitable environment due to the combination of low absolute yields and potential interest-rate increases by central banks as they contemplate policy normalisation.

A Flexible Approach to Fixed Income

SEI developed the Multi-Asset Credit strategy (MAC) for investors seeking to increase the likelihood of performing well across different economic environments relative to a traditional long-only fixed-income portfolio. The strategy seeks to efficiently generate steady income and total returns over a cash benchmark rather than a typical fixed-income market benchmark.

We aim to satisfy this objective in a way that capitalises on SEI’s competitive strengths via a core-satellite approach. Specifically, we employ a diversified, multi-manager construct that combines a core fund—which is top-down and absolute-return-orientated—with satellite funds, which are differentiated across a number of credit asset classes. Exhibit 1 depicts a breakdown of MAC’s combined target allocation.

The core strategy, which accounts for a majority of MAC’s target allocation, is a long/short global absolute-return fixed-income fund (GARFI) focused primarily on the sovereign bond and currency markets. It aims to capitalise on a global opportunity set, with less reliance on broad market returns than a long-only fixed-income strategy. Having a core allocation to this flexible, less directional strategy is expected to support the goal of delivering smoother performance across varying economic environments by exhibiting lower correlations with the overall direction of interest rates and credit spreads. We believe that affording a core allocation to GARFI will enable it to satisfy this key performance-balancing role and serve as a portfolio diversifier with the satellite exposures.

The satellite strategies, which constitute the balance of MAC’s target allocation, comprise long-only exposures to complementary fixed-income asset classes. Actively managed strategies in global investment-grade credit, high yield, and emerging-market debt serve as satellite allocations, while MAC retains the flexibility to add global investment-grade government and short-duration fixed-interest exposures depending on economic conditions.

The guiding principle of MAC’s design centres on efficient construction. Allocations among the satellite exposures seek a balance between generating excess returns over US Treasurys while remaining as diversified as possible. The core strategy—which is focused mostly on opportunities in global-government and currency markets—also has the latitude to pursue opportunities in credit markets as a secondary opportunity set only to be used judiciously. This design feature is intended to minimise overlap with the satellite exposures and improve efficiency of the overall strategy.

MAC’s allocations, particularly among the satellites, can be adjusted at SEI’s discretion in consideration of changing economic environments, which we expect will support the overall strategy’s objective of achieving positive absolute returns over the medium-to-long-term. In the absence of any adjustments, allocations can be expected to reflect their long-term strategic targets. Exhibit 2 shows MAC’s typical allocation ranges for core and satellite exposures.

Getting to the Core: Global Absolute Return Fixed Income (GARFI)

GARFI—the core component of the MAC strategy—is a long/short, absolute-return fund with a global orientation toward opportunities in sovereign bonds and currencies. Credit exposures represent a secondary opportunity set for GARFI, to be used more judiciously, with the intent of minimising overlap with the satellite exposures and improving efficiency of the overall MAC strategy.

GARFI seeks to capitalise on the disconnect between global macroeconomic themes and market prices. Focusing on the broad global picture provides a framework for identifying mispriced yield curves, currencies and related derivatives—primarily within major developed markets, but also on a less-frequent opportunistic basis in spread assets (non-government fixed income) and emerging-market debt.

Positions are typically relative value in nature—seeking exposure to select market dynamics while limiting exposure to others. GARFI also prioritises the minimisation of directional market exposure, or beta. This approach seeks to generate returns through consistent application of two principal disciplines:

› Identifying opportunities that can be expected to mean revert and  
                   
› Amending price targets through rigorous bottom-up and top-down fundamental analysis.

The process through which we seek to capitalise on mean reversion is conducted with careful analysis of the technical and structural headwinds that could delay or prevent realising potential opportunities.

Trade ideas are scrutinised through bottom-up, real-time analysis within the context of GARFI’s macro-thematic framework and sized with rigid discipline according to the expected volatility of each opportunity.

SEI’s Competitive Strengths

As an organisation, SEI has several decades of expertise in the construction and maintenance of diversified multi-manager fixed-income investment strategies. We favour the multi-manager approach in large part due to our confidence in its ability to deliver return consistency.

The particular objectives of our Multi-Asset Credit strategy extend naturally from this foundation of work. We believe MAC’s nimble and adaptive structure should help position investors for long-term success as the dynamics of global fixed-income markets continue to evolve.

Important Information

This document and its contents are directed only at persons who have been classified by SEI Investments (Europe) Limited as a Professional Client for the purposes of the FCA Conduct of Business Sourcebook.

This information is issued by SEI Investments (Europe) Limited, 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR, which is authorised and regulated by the Financial Conduct Authority.

No offer of any security is made hereby. Recipients of this information who intend to apply for shares in any SEI Fund are reminded that any such application may be made solely on the basis of the information contained in the Prospectus.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

There is no guarantee the strategies discussed will be achieved. The value of an investment and any income from it can go down as well as up. Investors may get back less than the original amount invested. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavourable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Bonds and bond funds are subject to interest rate risk and will decline in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments. The Funds use derivative instruments which may be used for hedging purposes and/or investment purposes.

Whilst considerable care has been taken to ensure the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.

Past performance is not an indicator of future performance.

Investments in SEI Funds are generally medium- to long-term investments.