Exploring the Alternative Credit Landscape
On Behind the Markets, a podcast brought to you by Jeremy Schwartz, WisdomTree Global Head of Research, we talk to market strategists, business executives and financial advisors about important trends underpinning the financial markets.
In this episode, Jeremy talks to Chris Acito, Founder, CEO and Chief Investment Officer at Gapstow Capital Partners.
Listeners will hear about:
- The challenges of traditional fixed income yields, and how pensions and institutions view alternative credit as a solution in portfolios. Many pensions are starting to add close to 10% exposure to alternative credit as an asset class.
- What Acito’s team views as alternative credit vehicles—how they look through underlying publicly traded vehicles to determine the types of loans they are trying to get exposure to.
- Key attributes of the components in the Gapstow Liquid Alternative Credit Index (GLACI), the index that the WisdomTree Alternative Income Fund (HYIN) was designed to track.
- What vehicles provide exposure to loans to public corporations, private corporations and commercial and residential real estate, and the diversified package of loans the Index is trying to represent through its constituents.
- The unique features of business development companies (BDCs)—from the underlying cost in these vehicles to how many traditional index strategies remove these companies due to the requirements around acquired fund fee reporting.
- The difference between market price and net asset value (NAV) of many of these alternative credit vehicles, and how market prices can dislocate and create extra volatility compared to NAV.
- The hybrid nature of these securities brings little correlation to the traditional bond market and particularly rising interest rates, since many of the underlying loans have a floating rate nature.
- The challenges of 60/40: These vehicles are almost hybrid in nature, seeking to provide risk similar to equities with higher yields that are similar to fixed income. By including them in a portfolio, they can help generate income while also dialing up risk exposure.
You can listen to our full conversation with Chris Acito below.
Important Risks Related to this Article
There are risks associated with investing, including the possible loss of principal. The Fund invests in alternative credit sectors through investments in underlying closed-end investment companies (“CEFs”), including those that have elected to be regulated as business development companies (“BDCs”), and real estate investment trusts (“REITs”). The value of a CEF can decrease due to movements in the overall financial markets. BDCs generally invest in less-mature private companies, which involve greater risk than well-established, publicly traded companies and are subject to high failure rates among the companies in which they invest. By investing in REITs, the Fund is exposed to the risks of owning real estate, such as decreases in real estate values, overbuilding, increased competition and other risks related to local or general economic conditions. The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit, and the Fund does not attempt to outperform its Index or take defensive positions in declining markets. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.
The credit ratings mentioned in the audio are published rankings based on detailed financial analyses by a credit bureau specifically as it relates the bond issue’s ability to meet debt obligations. The highest rating is AAA, and the lowest is D. Securities with credit ratings of BBB and above are considered investment grade.
Jeremy Schwartz has served as our Global Chief Investment Officer since November 2021 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity Indexes, quantitative active strategies and multi-asset Model Portfolios. Jeremy joined WisdomTree in May 2005 as a Senior Analyst, adding Deputy Director of Research to his responsibilities in February 2007. He served as Director of Research from October 2008 to October 2018 and as Global Head of Research from November 2018 to November 2021. Before joining WisdomTree, he was a head research assistant for Professor Jeremy Siegel and, in 2022, became his co-author on the sixth edition of the book Stocks for the Long Run. Jeremy is also co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” He received his B.S. in economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Jeremy is a member of the CFA Society of Philadelphia.