Morningstar - Q1 2020 - 64

Investors

Muzinich Credit
Opportunities Fund MZCSX
Growth of $10K

$12K
11.62
11.25
MZCSX

11

10

Morningstar US
Core Bond

9
01/2017

01/2018

01/2019

Morningstar Category

Multisector Bond

Morningstar Rating

QQQQ

Expenses (%)

0.60

Source: Morningstar Direct. Data as of 12/31/2019.

A significant chunk went to BBB bonds,
which grew from a 26% stake at the end of 2018
to 55% in October. In the fourth quarter
of 2018, spreads were widening across most
global credit, investment-grade, and highyield markets. Selectively taking advantage of that
trend, the team identified highly leveraged
companies that were hard hit when funding costs
increased, including AT&T, CVS Health,
and Cigna. In the plus column, these companies
have robust business models and are in
noncyclical sectors-and were taking action
on debt reduction.
"I love to find themes in credit where
the management team is aligned with the
bondholders for once, as opposed to the
stockholders," says McEachern. He says that
similar opportunities arose after the
global financial crisis of 2008 and the European
debt crisis in 2011, when companies shored
up their balance sheets.
This kind of strategy requires agility, and Muzinich
makes a conservative assessment of capacity
at around $7 billion for commingled assets. With
about $2.5 billion under management in the

64

Morningstar Q1 2020

U.S. open-end fund and its UCITS counterpart,
however, there is still room to grow.
A Winning Team

Russell Investments, a global investment
consultant and asset manager headquartered
in Seattle, began monitoring McEachern
at Seix and has been covering his current strategy
since its inception. Yoshie Phillips, senior
research analyst with Russell, says, "We liked his
approach of focusing on absolute return with
downside protection. We viewed his market
outlooks as sensible, hence developed a strong
interest in the strategy."
The fund has not disappointed. Its Morningstar
Rating of 4 stars at the end of December indicates
its strong risk-adjusted returns relative to
peers. Its 4.9% annualized return from its early
2013 inception through 2019 compares with 3.4%
for the category average and 2.8% for the
Aggregate Index.
The fund isn't likely to lead in rallies, but
its risk protection in rough times has bolstered
longer-term returns. That came into play
when bond markets were roiled in 2015. The fund's

Supra Institutional shares were up 1.5% that
year, even as its typical peer in the multisector
bond Morningstar Category lost more than
2%. (McEachern says that the fund had only 5%
in energy, the worst sector that year.) Performance
was boosted by another sound defensive
play in 2018, and the fund stayed competitive
in 2019, driven by the BBB play and a ramped-up
stake in emerging markets.
The Credit Opportunities fund is not yet rated
by Morningstar's analysts, but all its share classes
receive a Morningstar Quantitative Rating
of Bronze, bolstered by Above-Average People and
Process scores and relatively moderate expense
ratios. Moreover, the UCITS version of the strategy,
available to U.K. and European fund investors
under the name Muzinich Global Tactical Credit,
has received a Morningstar Analyst Rating
of Bronze. (The U.S. fund takes substantively the
same approach, though McEachern notes
that the UCITS fund has a loan maximum of
10%.) While Morningstar's analysts are cautious
about assessing a firm that has grown and
expanded into new areas in recent years, they
note the strengths of this strategy's experienced
team and sound process.
Morningstar - Q1 2020

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