Over the past decade, Multi-Asset Credit (MAC) strategies have gained significant traction among investors seeking efficient income generation and simplified asset allocation. By entrusting asset allocation to a single manager, investors can avoid the complexity and costs of managing multiple specialist mandates.
The MAC landscape, however, is highly diverse and fragmented. Some strategies focus narrowly on sectors such as corporate credit and bank loans, while others invest across the full credit spectrum—including both public and private markets. Geographic focus also varies, with some strategies adopting a global approach and others concentrating on specific regions or countries. Additionally, certain MAC strategies incorporate asset classes such as equities, real estate or distressed debt to further enhance return potential.
At Western Asset, we believe that simplicity and prudent diversification are essential for successful MAC investing. While some strategies seek higher returns by allocating to illiquid asset classes, employing complex derivatives or using leverage, these approaches often heighten drawdown risk, volatility and liquidity concerns. Additionally, certain multi-sector bond strategies with a stronger global macro focus than credit tend to adopt a barbell structure, concentrating equally in both low- and high-beta asset classes. This can leave them vulnerable during “taper tantrum”-type events, when both spread sectors and government bonds decline simultaneously. Finally, managers that concentrate portfolios in areas of their greatest expertise may inadvertently reduce diversification benefits, especially if those segments underperform for an extended period.
Western Asset’s MAC strategy is designed to identify cash-based securities that offer high current income across a broad range of sectors, including global investment-grade and high-yield corporate bonds, bank loans, collateralized loan obligations (CLOs), structured credit (such as asset-backed, commercial and residential mortgage-backed securities), and emerging market (EM) debt—both corporate and sovereign, in local and hard currency. Our research process is fundamentally driven and long-term in nature. We seek opportunities in undervalued or out-of-favor securities, distressed situations, potential upgrades and arbitrage opportunities. We deliberately avoid illiquid securities, esoteric derivatives and leverage, as these can increase the likelihood that price losses will offset the income generated.
While security selection is a core focus for the MAC team, top-down macroeconomic views are also integral to our portfolio construction process. The team leverages insights from Western Asset’s Global Investment Strategy Committee, which brings together regional and sector heads, including Michael Buchanan, our Chief Investment Officer and lead portfolio manager for MAC.
The committee meets weekly to develop a consensus on the global economic outlook and key macro factors such as interest rates, currency and central bank policy, setting investment strategy for the next six to nine months. Portfolio managers incorporate these views into their strategies, always adhering to each portfolio’s guidelines. Sector specialists, organized by market sector, focus on research and identify issuers and securities that meet our investment criteria, considering factors such as credit strength, liquidity, structure, event risk, covenant protections and market valuation.
From a bottom-up perspective, our research analysts strive to anticipate changes in credit characteristics ahead of the market and rating agencies. They conduct thorough analyses of competitive positioning, operating risks, business quality, free cash flow, debt reduction potential, liquidity, capital structure and bond covenants. The objective is to identify companies with improving credit fundamentals and a clear path to deleveraging.
It’s important to note that some MAC strategies may be benchmark-agnostic or unconstrained, while others use a soft benchmark for reference. Our MAC strategy doesn’t utilize a benchmark, as indices have become increasingly distorted by issuers with significant debt loads, which can force managers to hold these names simply to match the index. Additionally, combining multiple indices can create challenges with optimal weightings over time. Instead, we employ a volatility (risk) budget of 5% to 7%, which gives our team the flexibility to seek value across global credit markets while serving as a key risk-control mechanism. Historically, our portfolio volatility has been closer to 4%, reflecting our disciplined approach to credit quality.
Now that we have explained our rationale for a benchmark-agnostic approach to MAC, it’s equally important to outline the practical steps involved in constructing a MAC portfolio. At Western Asset, we don’t employ a “fund of funds” approach, where the lead portfolio manager simply delegates a portion of the portfolio to a sector team with full discretion; nor is our objective to simply replicate the exposures held in our dedicated sector strategies.
Instead, our MAC portfolio construction process is collaborative and iterative. Mr. Buchanan works closely with each sector head and sector analyst to ensure that MAC portfolios include the “best ideas” from each sector team. Each security that enters the MAC portfolios must not only offer compelling income and return potential but also have an ex-ante volatility profile that does not consume an inordinate amount of the strategy’s risk budget.
Our experience managing MAC since its inception in 2010 has shown that success can be defined by three key principles:
1. Transparent, Income-Seeking Process
Our approach is built on a transparent, income-seeking process, primarily through spread sectors and active sector rotation—allocating to sectors and subsectors with the most attractive risk-adjusted returns. This principle positions the MAC strategy to seek attractive returns in both stable and volatile markets, supported by diversification, active sector rotation and tactical duration management. While MAC may underperform during periods of sustained rising rates and widening credit spreads, it has traditionally recovered well when markets normalize. Importantly, we don’t increase portfolio risk in low-volatility environments, as this would conflict with our primary income objective.
2. Efficient Risk-Taking
As an active fixed-income manager, we seek to take on risk efficiently. The themes expected to generate excess returns should also be those driving risk in the portfolio. When risk and reward are properly aligned, the likelihood of achieving compelling returns can be meaningfully enhanced.
We’re often asked whether our MAC strategy has a high-quality or high-beta bias. The answer varies by portfolio, depending on client objectives and market conditions. However, in general, our representative MAC portfolio maintains a neutral stance on asset quality. While “quality” is often associated with a higher margin of safety, it’s important to underscore that even so-called “risk-free” assets have exhibited significant volatility in recent years, as evidenced by US Treasuries (USTs).
Some clients have also questioned whether USTs remain an effective hedge against broad market risk. Despite the breakdown in the historical correlation between US Treasuries and risk assets in recent years, which we view as a temporary phenomenon, we still believe that tactical duration positioning in a credit-oriented strategy such as MAC has strong merit.
3. Emphasis on Liquidity
We place strong emphasis on liquidity. Depending on market conditions and valuations, we may invest opportunistically in sectors such as bank loans if we believe we’re being adequately compensated for illiquidity risk, but we avoid outsized exposures to illiquid assets. This focus on liquidity is particularly important for investors concerned about meeting redemptions during periods of market stress.
At Western Asset, tailoring MAC portfolios to client preferences is central to our philosophy. We construct portfolios with distinct profiles across region, currency, sector and benchmark. When clients or prospects engage us about adding a MAC strategy to their investment program, some arrive with a clear vision—seeking either a comprehensive solution or a customized approach that excludes sectors they wish to allocate elsewhere.
We’re often asked how MAC can be used alongside a US Core or US Core Plus allocation. In these cases, MAC can act as a complement, potentially enhancing the overall risk-return profile of a fixed-income portfolio. US Core and US Core Plus strategies, typically benchmarked to broad indices such as the Bloomberg US Aggregate Index, seek to provide stability and capital preservation through high-quality bonds. However, their return potential is often constrained, especially in low-interest-rate environments.
By incorporating increased credit exposure, diversifying into non-US markets, and, in some cases, reducing duration, MAC strategies can enhance both yield and total return potential. This combination allows investors to implement a barbell approach, with US Core or US Core Plus serving as a relatively stable, lower-risk anchor and MAC providing higher return potential through dynamic exposure to higher-yielding credit sectors.
When paired with standalone sectors such as high yield, bank loans and EM, MAC can function as either a diversifier or a substitute. As a diversifier, MAC broadens credit exposure across multiple segments, helping to reduce concentration risk. Alternatively, MAC can replace direct allocations to high-yield or EM, allowing the manager to dynamically adjust sector exposures in response to changing valuations, fundamentals and market conditions. This active sector rotation can enhance downside risk management.
In short, for investors seeking to maintain credit exposure while reducing the complexity of managing multiple sector-specific strategies, Western Asset’s MAC strategy offers a simplified, actively managed solution.