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Your Questions Answered – Unconstrained Credit

Your Questions Answered: a Q&A series featuring the top questions that clients and prospective clients ask our investment teams.

How does Unconstrained Credit differ from other flexible credit solutions? Why do you use options? These are just a couple of the most commonly asked questions about our Unconstrained Credit strategy.

We sat down with our Fixed Income team as they tackled the most pressing questions about our Unconstrained Credit capability. Here we show some of the responses from the Q&A.  

1. How is our Unconstrained Credit strategy different to other flexible credit solutions? 

With a combined experience of over 40 years, the strategy’s portfolio managers Andrew Jackson, Head of Fixed Income, and Fraser Lundie, Head of Credit, have managed a spectrum of funds during downturns and crises.  Together, their vast experience alongside the diversity of our fixed income team acts as a key differentiator, enabling us to offer investors a dynamic credit-allocation solution that captures value from credit markets as investment conditions change and targets a gross return of the risk-free rate plus 5-6% per annum1. Although our specialist portfolio managers (such as EM, loans and ABS) and credit analysts provide views and trade ideas, final investment decisions and portfolio implementation are made by Lundie and Jackson.  

Other notable differentiators include: 

Bottom-up skill: through fundamental credit analysis, we identify issuers that drive returns in each credit market before searching their capital structures for the most attractive instruments.

Top-down oversight: we apply expertise from across the credit spectrum as well as insight from other asset classes. The Multi-Asset Credit Investment Committee (MACIC) drives our appetite for risk, steers the strategic asset allocation across credit classes based on their relative value, and determines what hedges are appropriate for the prevailing market environment. 

Full spectrum: unrestricted by security type or geographical silos, we seek to exploit opportunities in developed and emerging markets for investment grade and high-yield corporate bonds, credit default swaps, loans, asset-backed securities and government securities.

Our best ideas: the strategy selects from our team’s best long-only credit ideas, which, combined with a dynamic asset allocation framework, offers the potential to enhance our team’s ability to achieve positive absolute returns through the cycle. 

Downside defence: optimal convexity is achieved by a dynamic options overlay that aims to protect against large market and macro risks and acts as a hedge for our high-conviction credit strategy in times of market disruption. There will be instances where this approach is complemented by very material increases or reductions in risk on the long side as dictated by our risk appetite. This combination enables the strategy to manage through periods of stress to capture opportunities and significantly dampen volatility and has been instrumental in driving performance to date.

ESG advantage: we price ESG risks within fundamental credit selection combined with market-leading company engagement alongside our stewardship services team, EOS at Federated Hermes.

Structured with independent risk management: we operate with the flexibility of a boutique, while enjoying the support and resources of a major asset management firm, including independent risk oversight provided by the Federated Hermes Investment Office.