Morningstar - Q1 2020 - 62

Investors

From the Top
Muzinich Credit Opportunities takes
a tactical approach to global credit.

UNDISCOVERED MANAGER

Laura Lallos

In every issue, Undiscovered Manager profiles
a noteworthy strategy that hasn't yet been
rated by Morningstar Research Services' manager
research group.
In the early part of his investing career, Mike
McEachern built his bond expertise asset class by
asset class. Starting out in private placements
and working as an analyst in high-yield,
investment-grade, and even municipal bonds, he
developed an expertise in the bottomup fundamental analysis that underpins his
strategy today.
"Ultimately, when you're in credit," he says,
"you have to understand the risk inherent in any
corporate bond."
But McEachern began gravitating toward
a top-down themed approach in the late 1990s.
The Asian financial crisis had started
to affect the U.S. markets, he says, and "that
cemented the idea that it's very important
to understand the interconnectedness of your
broader exposures."
He recalls a seminal experience when
working at an insurance company in Louisville,
Ky.: "The people I learned from had a totalreturn mindset. They were great mentors. There
was something of a mini-energy crisis, and
one of the portfolio managers immediately put all
$140 million of her airline bonds up for bid
in one decision. That was a critical incident in my
career. As a result, I'm not incremental; I'm a
decisive decision-maker."

Morningstar Q1 2020

In 1997, McEachern landed at New Jerseybased Seix Investment Advisors, where he built
a high-yield team from scratch and became
president of the firm. After 14 years, when some
of his partners were retiring, he decided it
was time to broaden his reach.
That's where Muzinich & Co. came in. The privately owned firm, founded in New York in
the late 1980s, had expanded to London a decade
later and aimed to be a premier global credit
boutique. With the support of George Muzinich,
who fostered an entrepreneurial environment,
McEachern saw an opportunity to build a business.
Muzinich also provided the bottom-up
research support necessary for the wide-ranging,
top-down strategy McEachern wanted to
implement. The Global Tactical Credit strategy
launched at the beginning of 2013, shortly
after McEachern joined the firm. The multi-asset
strategy-which includes a U.S. mutual
fund version, Muzinich Credit Opportunities Fund
MZCSX-aims to outperform Libor by 3%
to 5% over a full credit cycle, with annualized
volatility of 5% or lower.
Silvercrest Asset Management didn't hesitate
to sign on. Silvercrest, a New York-based
Registered Investment Advisor with $22 billion
in assets under management, had engaged
McEachern to manage a high-yield portfolio when
he was at Seix and then followed him
to Muzinich.
"We invested in Muzinich Credit Opportunities Fund
on day one," says managing director Ian Smith.
"We had confidence in Mike's investment
acumen and expertise. He has an extraordinary
trading instinct that has helped deliver great

risk-adjusted results, and Muzinich has
global reach with a great deal of breadth and
depth in terms of analytical resources."
Free Range Within Limits

The fund can invest in the United States,
Europe, and emerging markets and can allocate
to investment-grade, high yield, and loans.
Morningstar classifies it in the multisector bond
category, and McEachern says some clients
allocate it to a multisector sleeve intended to be
less correlated to other fixed-income investments. But the strategy's appeal is versatile. Some
pension plans and insurance companies slot
the fund in as a conservative high-yield approach.
Other institutional clients deploy the fund
more as a core holding, measured against the
broad Bloomberg Barclays U.S. Aggregate
Bond Index.
Smith says that Muzinich Credit Opportunities
serves well as a core holding for some
Silvercrest clients precisely because of the
unconstrained nature of its strategy,
particularly in today's fixed-income market:
"The team can seek value wherever they see it.
There is a lot of appeal in that flexibility
in an environment where interest rates remain
near 70-year lows."
McEachern makes decisive use of that
flexibility. For example, the fund had more than
40% of assets allocated to high yield in
late 2017 and was down to under 25% a year
later. Meanwhile, bank loans went from
an allocation of 13% to 0%. The team won't stretch
for yield, and bank loans have much less
asset value than the high-yield universe overall.
The team generally looks at valuations and spreads
over a six-month to one-year period to determine
when to sell. When the portfolio's overall
return is trending close to negative 50 basis points,
McEachern is quick to cut whatever is holding
it back-for example, the fund portfolio
has rotated in and out of the volatile energy sector
several times. This past September, McEachern
started cutting duration a little because rates were
bouncing around. (The strategy's duration
guidelines are zero to 6 years, with 3.5 years its
neutral stance.)

Morningstar - Q1 2020

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