Liquid Alternative Monthly Investment Spotlight: Pioneer Dynamic Credit Fund (RCRAX)

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As part of our monthly series of spotlighting one of our Liquid Alternatives preferred holdings, I would like to provide some color on the Pioneer Dynamic Credit Fund (symbol: RCRAX).

On the surface, RCRAX may look like any other bond fund and one may ask what it’s doing in our alternative model line-up. Well, it’s anything like a traditional bond fund once you take a look under the hood. RCRAX is a non-traditional fund utilizing fixed income securities in alternative ways such as shorting or using derivatives, default swaps, event linked bonds, etc. As such, it’s basically an absolute return fund using fixed income vehicles.

Let’s review a little about the credit markets. Income is now a scarce commodity. As a result, investors are forced to take on more risk in order to achieve the same levels of income that they have experienced in the past. Unfortunately, fixed income investors face a more volatile and uncertain investment environment than the last few decades. However, volatility can create opportunities, and a flexible investment approach may be able to capitalize upon these opportunities.

Credit can provide strong returns, but one must tread carefully as downturns in the credit cycle can cause large a drawdown, the peak-to-trough decline during a specific record period of an investment. The traditional response to a credit downturn is to increase credit quality and/or add Government Bonds. The former can hurt the portfolio due to transaction costs as market liquidity deteriorates. The later may be less effective in the future given how compressed the yield curve is. We think a more effective risk management strategy for an all-credit portfolio lies in what Pioneer calls their multi-layered hedging approach. This multi-layered hedging strategy seeks to buffer volatility and provide a measure of protection from extreme market dislocations. And as our clients know, protection is one of our number one goals at DWM.

Put it all together and you have a multi-sector credit portfolio designed to adjust allocations in order to take advantage of opportunities based on valuations, volatility, dislocations and market timing across credit markets. Portfolio construction, allocation, and security selection are driven by an integrated quantitative and fundamental research framework. We get excited about this fund because it can and does short different parts of the bond market, which means it can take advantage of rising rates! It also plays in areas that the standard traditional bond funds don’t, like convertible securities, floating rate securities, and currencies.

This approach has landed RCRAX in the top quartile of the non-traditional bond category as determined by Morningstar since its inception in 2011. And of course this approach has given us reason to give it a seat in our Liquid Alternative model.

Again, alternatives provide an additional asset class that can produce new sources of returns with lower correlation and reduced volatility. We expect volatility and returns for the alternative portion of one’s portfolio to be somewhere between what you would expect of stocks and bonds, with an extra bonus emphasis on downside protection. We continue to watch this exciting area of investment management for continued opportunities and use this forum as an educational tool.

Please don’t hesitate to reach out to the DWM team if you have a particular question on liquid alternatives and/or just want to say ‘Hi’!

Liquid Alternative Monthly Investment Spotlight: AQR Managed Futures (symbol: AQMNX)

Graph picAs part of our monthly series of spotlighting one of our Liquid Alternatives preferred holdings, I would like to provide some color on the AQR Managed Futures Mutual Fund (symbol: AQMNX). There are a few different ways to get exposure to managed futures. We think the best liquid and cost-efficient way to do so is by using a single manager option vs. a multi-manager option, which means there are not multiple layers of fees. Although this fund is managed systematically, the firm’s principals have been managing trend-following strategies for institutional clients since the mid-1990s. We are big fans of the managers who have some of the best alternative experience in the business. AQR was founded in 1998 and is headquartered in Greenwich, CT, and also have satellite offices in Chicago, London, and Sydney. I personally visited their Chicago offices and was very impressed with everything, particularly the culture. Their philosophy and approach is deeply grounded in empirical finance research.      

Managed futures investing is an alternative investment strategy in which portfolio managers look to profit from identifying short and/or long term trends via the use of future contracts. Introducing futures into a portfolio reduces risk because of the negative correlation between asset groups.  

This managed futures fund invests in commodities, equities, currencies, and fixed income – they gravitate to the spot where the research is identifying the best trend. They also work in both short-term trends (one to three months) and long-term trends (up to 12 months). Both long and short positions are employed. Of course, we think the best part of this strategy is the non-correlation it brings to the table which ultimately offers more protection to your overall portfolio should the stock market fall off. If stocks head south, this fund has no correlation and is doing its own thing. In 2008 when stocks got torn apart, managed futures was one of the only strategies that really excelled. With the equity bull market being “long in the tooth” and with fixed income not the most attractive place to be right now, we really like holding this position within our Liquid Alternatives Model and clients’ portfolios.

Again, alternatives provide an additional asset class that can produce new sources of returns with lower correlation and reduced volatility. We expect volatility and returns for the alternative portion of one’s portfolio to be somewhere between what you would expect of stocks and bonds, with an extra bonus emphasis on downside protection. We continue to watch this exciting area of investment management for continued opportunities and use this forum as an educational tool.

Please don’t hesitate to reach out to the DWM team if you have a particular question on liquid alternatives and/or just want to say ‘Hi’!