CASE STUDY

Multi Asset Credit

UK Local Government Pension Scheme | Autumn 2020

Engagement at a glance

Multi Asset Credit

A UK LGPS was seeking to invest up to £80 million (US$105 million) in a multi asset credit solution using one manager. Pooled funds were preferred with new launches considered, so long as they met a return target of cash plus 4%-5% p.a. gross of fees.

Client-specific Concerns

Notable requirements for this investor included low (or zero) exposure to emerging market debt, low interest rate sensitivity and strong ESG credentials with an ability to report on carbon risk within the proposed portfolio. Fee levels were also a priority for this client, heightened by the current sharp focus on cost efficiency across the UK LGPS.

Outcome

  • Maximising client choice and understanding, with a diverse group of strategies spanning the multi asset credit universe. Although the client had a number of notable restrictions, with the return requirements in particular ruling out more conservative offerings, the parameters still enabled the inclusion and analysis of a broad range of strategies: sub-investment grade and unconstrained; globally diversified and regionally focused. The process supported the investor in gaining a strong understanding of the different approaches and relative risks involved, as well as considering ‘portfolio fit’ for each.

  • Engagement and discussion on the inclusion of Emerging Market Debt. A large number of strategies in this space use EM debt as a source of yield and diversification from developed market credit risk. Following analysis and discussions, the investor decided to consider solutions that incorporate a limited degree of exposure, appreciating the role that this asset class can play within such strategies – particularly the lower volatility provided by EM hard currency bonds. The process did continue to exclude strategies where EMD comprised a ‘core’ element of portfolios.

  • Assessing managers’ capabilities in different sub-sectors. The investor received detailed analysis of managers’ capabilities in each of the underlying fixed income asset classes that formed their strategies, including the breadth or depth of capabilities and the tenure or experience of the investment team. In many cases, the manager does not have standalone strategies in areas such as securitised debt or leveraged loans, provoking questions about strengths in those areas.

  • When it comes to ESG considerations, big houses are not always better. Although this is an area of ever-increasing focus for managers and investors, approaches vary widely, ranging from sector or issuer exclusion to full integration of ESG factor analysis into credit analyst recommendations. When reviewing managers’ ability to report on carbon risk, close attention was paid to both the analysis of issuer level data as well as the frequency and content of reporting for pooled funds. It’s not always the case that large asset managers offer the best approach: boutique firms are often better-placed to offer ESG insights within niche areas of the market such as securitised debt and emerging market debt.

Our specialist says