Scott Richardson

Being systematic doesn’t mean overlooking the fundamental risks in the corporate credit asset class, said Scott Richardson, senior vice-president and director of systematic credit at Acadian Asset Management, during the Canadian Investment Review‘s 2023 Investment Innovation Conference in November.

“What’s the risk? It’s a company — they make stuff [and] chose to fund themselves in a certain way, so, I need to understand the capital structure of the firm and the business model. These are aspects any active investor in credit markets should consider. We are fundamental investors. . . . We’re just forcing ourselves to be very disciplined in exercising discretion up front to sort through data to identify an attractive investment opportunity and systematically map that story to extract alpha.”

Read: How are institutional investors considering alternative credit amid rising interest rates?

Institutional investors can access a lot of data to enrich how they forecast credit risk, he said, noting when investing in private credit markets, it’s important that investors assess the correct data to see if asset allocations are adding diversification to the overall portfolio.

Interest rate expense, operating profitability, book leverage and market leverage are among the factors to consider when gauging the performance of a typical corporate issuer. “Companies have enterprise risk. They make stuff, sell stuff and they need to generate enough free cash flow to service those contractual commitments as they fall due.”

The size of private credit today is at least as big as public high yield, he said, noting, 10 to 15 years ago, that section of the market barely existed. When there’s massive amounts of growth in an asset class, most investors shy away from a lot of realized growth in the context of a loan book.

Read: Investments in global private credit surpassed US$1.3T in 2022: survey

While it can be challenging for institutional investors to access data, there’s a broad proliferation of venues and protocols that facilitate trading, said Richardson.

“So, there’s more people looking at liquidity today. A lot of data vendors have evolved over time. It’s not perfect, but it makes it easier for [investors] to map a lot of disparate data back to the bond of an operating company [they’re] choosing to take credit risk in. So, while the challenge is to get it right, I think this is a huge opportunity.”

Read more coverage of the 2023 Investment Innovation Conference.