Role in the portfolio: LACERA expects assets in this category to produce current income and moderate long-term total returns. Credit has more moderate levels of risk than assets categorized as growth, and accordingly, provides incremental diversification to the total fund.
- High Yield
- Bank Loans
- Emerging Market Debt
- Illiquid Credit
Credit assets are generally fixed claims on assets or income streams of an issuer (e.g., government, corporation, or asset-backed securities). The category is composed of certain fixed income, hedge funds, real estate, and private debt investments. Investment strategies within this category may have a specific mandate (e.g., high yield or emerging market debt) or may be multi-strategy. The investment strategies may be liquid, illiquid, or a combination of both, depending on the nature and terms of the specific investment vehicle. LACERA employs active strategies across all asset classes within the Credit category, but may employ passive strategies in certain segments that are relatively more efficient.
The primary risk for owners of credit assets is the failure of the borrower to make timely payments of interest and principal. There are three elements of credit risk: the risk of default; the risk of a credit downgrade; and spread risk, which is the risk that investors may demand greater compensation for bearing the first two types of risk. Bonds with credit risk offer a yield premium over government bonds to compensate investors for the additional risk. Bonds with greater credit risk (i.e., bonds with lower credit ratings) are typically less liquid than higher quality bonds.