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.
