Helping pension schemes in the pursuit of sustainable yield
Focus is a publication that aims to bring you face to face with a selection of key investment managers, advisers and providers from across the institutional pensions market.
© 2021 Incisive Business Media (IP) Limited
With over £1trn of investments held in pension funds on behalf of millions of people across the UK, it is no surprise pension schemes are under increasing scrutiny to better integrate sustainability into investment decisions.
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For Professional / Qualified Investors only – not for Retail use or distribution.
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This marketing document has been prepared and approved by TwentyFour Asset Management LLP (“TwentyFour”), a company of the Vontobel Group (“Vontobel”), for information purposes only. This document has not been submitted to or approved by the securities regulatory authority of any state or jurisdiction. Neither this document nor any copy of it may be distributed in any jurisdiction where its distribution may be restricted by law. In particular, this document must not be distributed or handed over to US persons and must not be distributed in the USA. Persons who receive this document should make themselves aware of and adhere to any such restrictions. It shall not constitute an offer or invitation or any solicitation of any offer to sell or to subscribe for or buy any securities described herein or to effect any transactions or to conclude any legal act of any kind whatsoever. Accordingly, you must independently determine, with your own advisors, the appropriateness for you of the securities before investing. All information contained in this document is based on the best information available at the date of initial publication, it is not intended to predict actual results and no assurances are given with respect thereto. Neither TwentyFour, nor any other person undertakes to provide the recipient with access to any additional information or update this document or to correct any inaccuracies therein which may become apparent. TwentyFour does not warrant the accuracy or completeness of any information contained herein, and therefore it should not be considered as an indication of trading intent, investment advice, or a personal recommendation. As such, TwentyFour accepts no liability for any use, or misuse, of the material in this commentary. This material may not be reproduced, in part or in whole without the express prior written permission of TwentyFour. Past and forecasted performance are not reliable indicators of future performance. Additionally, there can be no assurance that TwentyFour will be able to implement the investment strategy or any securities will achieve the investment objectives. In particular, statements contained in this document that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of the author, and do not necessarily reflect the views of TwentyFour or other members of Vontobel. They may also no longer be current and may have already been acted upon. Such statements involve known and unknown risks, uncertainties and other factors, and reliance should not be placed thereon. In addition, this document contains “forward-looking statements”. Actual events or results or the actual performance of accounts may differ materially from those reflected or contemplated in such forward looking statements. Prospective investors are reminded that the actual performance realised will depend on numerous factors and circumstances, some of which will be personal to the investor. Please remember that all investments come with risk. Positive returns, including income, are not guaranteed. Your investment may go down as well as up and you may not get back what you invested. Investing in fixed income securities comes with risks that can include but are not necessarily limited to credit risk of issuers, default risk, possible prepayments, market or economic developments, inflation risk and interest rate risk. This document does not disclose all the risks and other significant issues related to an investment in the securities. Prior to transacting, potential investors should ensure that they fully understand the terms of the securities and any applicable risks. This document is not a prospectus for any securities described herein. Securities that may not be sold or offered or otherwise made available to retail investors in the UK or the European Economic Area will not have a Key Information Document prepared as required by Regulation (EU) No 1286/2014 (as amended the “PRIIPS Regulation”, and its UK onboarding and onshoring legislation). Investors should only subscribe for any securities described herein on the basis of information in the latest available Prospectus and any applicable local offering document a copy of which can be obtained free of charge in English at www.twentyfouram.com TwentyFour Asset Management LLP is registered in England No. OC335015, and is authorised and regulated in the UK by the Financial Conduct Authority, FRN No. 481888. Registered Office: 8th Floor, The Monument Building, 11 Monument Street, London, EC3R 8AF. Calls may be recorded for training and monitoring purposes. Copyright TwentyFour Asset Management LLP (all rights reserved).
At TwentyFour Asset Management, this drive has led the group to formalise its approach to sustainable investing in two different ways to assist pension schemes on their integration journey.
The guide also explores the latest sustainable fund launch from TwentyFour Asset Management; a Sustainable Multi Sector Credit Fund targeting higher yields for today’s uncertain environment.
In this guide, we explore the growing importance of sustainability in pensions investment management and explore how the industry and fund managers are working together to address insufficient ESG data and drive change through active engagement.
For Professional Clients only
Against this backdrop, TwentyFour Asset Management has launched the TwentyFour Sustainable Multi Sector Credit Fund – aiming to deliver higher yields by targeting less-liquid credit opportunities and taking a high conviction approach to asset selection.
In this guide, we explore the fund’s strategy in detail and analyse how it seeks to tackle the uncertainty of today’s market while also matching investors’ sustainability expectations.
The global pandemic has left capital markets facing radical uncertainty.
Mike Fox and Rachid Semaoune on sustainable global credit investing
The pursuit of yield in sustainable credit
Focus is a publication that aims to bring you face-to-face with a selection of key investment managers, advisers and providers from across the institutional pensions market.
Trustees and ESG transparency
Why the wrong ESG information is meaningless for trustees
Name xxxxxx xxxx xxxxx xxxxxxx
October 2021 will see the introduction of new, stringent reporting requirements on climate change risks for large pension schemes across the UK. With over £1.3trn of assets held in occupational pension schemes across the UK, it is no wonder the UK government sees pension funds as a key player in the transition to net zero in particular.
and the journey to net zero are just three of the core themes in this area that have moved to the top of investment agendas. However, ESG integration is a complicated and time-consuming process, and fund managers play a key role in helping pension funds on this journey.
ecent years have seen a growing interest in ESG from UK pension fund trustees, a trend that has been accelerated by the pandemic, growing regulatory pressures, and changing priorities globally. Today, climate risk mitigation, social concerns,
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Transparency versus relevancy:
For pension scheme trustees, the rules create new complexities when it comes to their investment strategies and unsurprisingly, some are struggling to comply with new requirements. According to a survey conducted by consultancy EY earlier this year, the majority of UK pension schemes (71%) are yet to consider the impact ESG factors have on their sponsors’ covenants, while just 12% have a finalised strategy in place to address and report on climate risk.
Karina Brookes, UK pensions covenant advisory leader at EY-Parthenon, says: “Many sponsors are facing material disruption and risk to their sustainability as a result of the structural shifts currently reshaping the global economy. In many sectors the timeframe of these changes has been accelerated by the pandemic and trustees need to ensure their decision-making is underpinned on an understanding of these factors.”
This is where asset managers can step in to support pension fund trustees in meeting their climate obligations. For bond specialist TwentyFour Asset Management, this is becoming an increasingly integral part of its work with pension fund clients in 2021. The firm integrates ESG factors across its investment process, while also offering dedicated sustainable products for clients looking to go green in their bond investment strategy.
Working together
Alistair Wilson, partner and head of institutional business at TwentyFour, expects ESG integration to be an area where pension trustees will rely on their fund managers to “do the heavy lifting”.
“We used to talk about people, process and performance, but today ESG is the single biggest factor we discuss in meetings with trustees and consultants,” Wilson says. “It’s such a big topic for pension schemes today. The larger ones particularly are being very proactive, but they are still looking for the fund managers to come up with the solutions.”
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Why TwentyFour Asset Management for Sustainable Multi Sector Credit?
Today, ESG is the single biggest factor we discuss in meetings with trustees and consultants
The process to true ESG integration can be long, complex and difficult for pension schemes - which is why TwentyFour Asset Management has re-aligned its investment thinking to help schemes on their sustainable journey goals
Alistair Wilson, partner and head of institutional business
A long track record of adding value both through asset allocation and stock selection, harnessing our specialist skillsets
The managers aim to access the best relative value investments available in the fixed income universe on a global basis
TwentyFour has put sustainability at the core of this offering having developed a proprietary approach to ESG integration within fixed income
We have invested in our business to create an experienced, stable, team along with a robust investment process across all our products
Hover over each section.
Gary Kirk, co-manager, TwentyFour Sustainable Multi Sector Credit Fund
has helped drive risk asset valuations ever higher despite the damage wrought by COVID-19, compressing yields and making portfolio income distribution objectives harder to achieve in both equities and fixed income.
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THE INTERVIEW
According to law firm Norton Rose Fulbright, pension fund trustees must work together with their managers to integrate ESG and stewardship matters on their investment processes, since “the legal responsibility to ensure that ESG and stewardship are properly integrated rests with the trustee”.
At TwentyFour, the aim is to offer pension trustees investment products they are comfortable investing in both on ESG grounds, but also in terms of their return expectations. Wilson explains it is a “balancing act” between ESG with investment objectives. This means finding the sweet spot where “the investment universe is still wide enough for us to do our job, making sure volatility is within reasonable levels, while still meeting core investment objectives”, he says.
However, he cautioned that burdening pension trustees with such information is not the way forward. “Transparency, but relevancy, is so important. You can throw rafts of reports at trustees, but it just makes it meaningless,” he explains.
In many respects, UK pension funds and fund managers face the same level of challenges when it comes to ESG integration. One of the biggest is availability of data, which can be particularly problematic in the fixed income space.
“Gathering this data is probably the single biggest issue that is facing any manager or trustee,” says Wilson. Collecting data that can help pension funds compare fund metrics in an easy-to-understand way is therefore one of TwentyFour AM’s objectives, with particular emphasis on quantifying the carbon intensity of funds versus the benchmark.
ESG integration challenges
This is where scoring systems, such as TwentyFour AM’s proprietary, relative-value system, Observatory, can help pension funds decide if an investment fits in with their overall goals.
The Observatory scores bonds on a raft of ESG metrics to come up with an overall score that helps the managers decide whether a bond is suitable for a particular strategy. This is one of the metrics underpinning the group’s latest sustainable fund launch, the TwentyFour Sustainable Multi Sector Credit Fund.
However, despite the difficulties involved Wilson does not see the interest in ESG from pension funds diminishing. “The momentum has gathered,” he says. “Every conference we go to, half the presentations involve ESG in some shape or form. It is quite self-fulfilling.”
Sustainable momentum
Regulatory pressures, a spreading belief that green investing is “the right thing to do”, as well as a growing body of evidence that ESG-friendly companies tend to outperform laggards, are all driving forces behind the structural shift towards ESG. Fund managers will increasingly find themselves required to support pension trustees in this transition as net zero deadlines draw nearer and the pressures intensify.
Fund managers will find themselves required to support pension trustees as net zero deadlines draw nearer
FUND SNAPSHOT
SUSTAINABILITY VS VOLATILITY
INTEGRATING ESG
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There needs to be overarching sustainable regulation that covers everybody, giving bond investors and issuer alike effective guidance
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Charlene Malik, portfolio manager
TwentyFour Sustainable Multi Sector Credit Fund
SUSTAINABILITY, VOLATILITY, AND THE PURSUIT OF RISK-ADJUSTED RETURNS
Alistair Wilson, partner
TRANSPARENCY VERSUS RELEVANCY
Integrating ESG
icons for each point?
“There is so much information, and no standard way to report it”
Integrating ESG:
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We will not invest in any country listed on the active UN Security Council sanctions list. In addition, we will exclude companies domiciled in countries (or their main country of risk) where we believe they have a poor
Our back-testing showed that combining positive stock screening with negative sector screening can give a favourable balance between risk and reward.
Tobacco
Alcohol
Carbon intensive
Arms
Adult entertainment
Gambling
*Source: TwentyFour.
Negative sector screening
Positive sector screening*
Source: TwentyFour. *As at February 2021
ESG is at the core of TwentyFour
At TwentyFour, every portfolio manager conducts active ESG analysis on every investment they make
Charlene Malik, portfolio manager, TwentyFour Sustainable Multi Sector Credit Fund
Trustees want to make sure that ESG is an intrinsic part of our process as a manager – and that is something we have done for a long time. They ask for a lot and there is demand, not just for sustainable products, but to make sure that in our portfolios we are doing the right thing, engaging with issuers on the environmental and social implications of their business practices.
What are the considerations for pension schemes looking at ESG, and how are trustees addressing this issue?
In Europe there is so much going on. At the moment, there are so many different directives, initiatives, labels and so on all operating at once that it can actually distract the businesses and institutions trying to implement the right changes. From my point of view, there needs to be overarching regulation that provides effective guidance to both bond investors and issuers alike.
In Europe the industry has been relatively proactive on ESG factors. By contrast, the US has lagged so much that ESG wasn’t really on our clients’ radar there until more recently. However, with President Biden’s focus on climate change, we’ve found that it has stepped up a gear and in our view that’s really positive.
How important are the recent regulatory changes in Europe and the US?
The first thing to highlight is we do not have a separate ESG team. ESG considerations are integrated throughout every one of the firm’s strategies, so every portfolio manager conducts active ESG analysis on every investment they make.
There are overarching principles within our ESG framework. The first thing is no ‘sin’ industries – no oil and gas, no tobacco, no gambling, no alcohol. While for emerging markets we acknowledge that there are governments in that sector that have poor ESG records and a recent history of scandals as well as the fact that in some emerging markets a number of companies are subject to a degree of state ownership or influence. For example, can we invest in Saudi Aramco given the ESG principles of the Saudi government? We don’t think we can.
What is TwentyFour’s ESG process?
Any third-party scoring system requires scrutiny. For example, Coca-Cola and Diageo score very well in our systems and other systems as well. The reason for this in our view is they are huge companies, and they are able to put a lot of resources to presenting their ESG credentials in the best possible light.
There are some companies that do not put the same resources into glossy ESG reports, but when we speak to them, as we do with all companies, we find they are doing plenty of work and their practices are very ESG-friendly, with aggressive targets and a clear vision.
For us, such active engagement with smaller issuers, who may lack the ability to dedicate resources wholly to ESG matters, can uncover real value for clients and neatly demonstrates the difference active managers can make.
Obviously, as bondholders, we don’t have voting rights to express our views on a company’s business practices, as shareholders do. But every portfolio manager has a relationship with these companies. If we want to express our dissatisfaction with an issuer on something or want to influence them to act in a certain manner, we have that direct route to the company’s decision makers.
We are high conviction managers, which means we don’t tend to hold tiny amounts in thousands of different positions; when we invest we do so meaningfully. We can decide to exit a bond if we are not happy, or we can refuse to participate in any refinancing if we have ESG concerns, and we have done so previously.
As an example, CoreCivic is a private US prisons company that attracted controversy for its potential involvement in the detention of children away from their families at the Mexican border. Needless to say, we exited that business.
Can fixed income funds have real influence on ESG issues at companies?
Investors face a mountain of regulation and a torrent of data and metrics relating to ESG factors. Charlene Malik, portfolio manager on TwentyFour’s newly launched Sustainable Multi Sector Credit Fund, explains the firm’s approach to these challenges
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Source: TwentyFour.
Investing in only the companies that score highly enough following our ESG evaluation.
But by reducing the universe there are implications on expected volatility as diversification is reduced.
We are high conviction managers, which means we don’t tend to hold tiny amounts in thousands of different positions
There needs to be overarching regulation that covers everybody, giving bond investors and issuer alike effective guidance
We will not invest in any country listed on the active UN Security Council sanctions list. In addition, we will exclude companies domiciled in countries (or their main country of risk) where we believe they have a poor ESG track record and/or policies. From countries where we have previously/are invested in our strategy, the following will currently be excluded from this fund: Saudi Arabia, Russia, China, UAE & Turkey.
This is on everyone’s mind. I think we all want to gift a healthy planet to our children, so we want to make sure we are helping drive positive change and encouraging behaviours that help meet that aim. We face this consideration as asset managers, the institutions we serve face it from clients, and its urgency is becoming more evident through the whole chain.
What is creating the demand from institutional investors for a sustainable approach?
In Europe the industry has been relatively proactive on ESG factors; the US, by contrast, has been so far behind that ESG wasn’t really on our clients’ radar there until more recently. But with President Biden’s focus on climate change, it has stepped up a gear and that’s really positive.
Market outlook
Investors face a mountain of regulation and a torrent of data and metrics relating to ESG factors. Charlene Malik, portfolio manager on TwentyFour’s newly launched Sustainable Multi Sector Credit Fund, explains the firm’s approach to these challenges.
We recently held a couple of roundtables with a number of trustees and it was clear ESG considerations are a major issue for them. The main challenge they’ve experienced to date is that there is so much information out there and no standard way for companies to report it, so the trustees themselves are having to push from their side to make sure managers are focused on sustainable investment.
Next it is a case of digging into the ESG score. We use a third-party scoring system, Asset4 by Refinitiv, which is integrated into our own in-house system. What we found was that regardless of whatever third-party scoring system we use, it would only cover about 50%-60% of our investable universe.
Fortunately, and one of the key reasons we opted for Refinitiv, they have a scoring system that is very transparent and we can see all the data points that feed into it. Therefore when a portfolio manager is looking at a company that does not have a score, they are able to revert to our own proprietary system, Observatory, which is based on the Refinitiv data points so we know we are making pertinent comparisons.
ESG track record and/or policies. From countries where we have previously/are invested in our strategy, the following will currently be excluded from this fund: Saudi Arabia, Russia, China, UAE & Turkey.
Creating a balance between rewarding good ESG behaviour and providing a wide enough universe of stocks to allow sufficient diversification has led us to require a minimum 34 on our ESG scoring model. This equates to around half the overall universe.
34
Sustainability vs volatility
As investors now grapple with an uneven economic recovery, the threat of inflation and uncertainty over the path of global monetary policy, addressing this income gap is not easy, especially when combined with the need for capital growth and adherence to risk parameters.
The launch comes at a time when investors are emerging from a crisis period and looking to address new and old challenges. In particular, TwentyFour’s Sustainable Multi Sector Credit Fund will aim to meet client ESG expectations through a carefully calibrated combination of negative and positive screening. The ‘negative screen’ excludes ‘sin’ industries and certain other investments that in TwentyFour’s model don’t meet minimum ESG standards – no investment in Saudi Arabia or China, for example. The positive screen then combines third party data from Refinitiv-owned Asset4 with TwentyFour’s own proprietary scoring system, applying a threshold ESG score such that only issuers in the top two-thirds are eligible for the portfolio.
Focus on Sustainability
portfolio income distribution objectives harder to achieve in both equities and fixed income.
ncome remains a scarce commodity in today’s markets. Large-scale intervention by governments and central banks in 2020 has helped drive risk asset valuations ever higher, despite the damage wrought by Covid-19, compressing yields and making
For pension schemes in particular the hunt for income is as hard as ever, says Alistair Wilson, head of institutional investment at TwentyFour, as investor demand and regulatory change throw the spotlight on environmental, social and governance (ESG) concerns.
“A lot of pension schemes are still underfunded and looking for returns, but they need to do that in the lowest risk way they can,” he explains. “That typically means moving out of equities and into fixed income. This shift means there is no point spending all your effort on ESG for equities when it’s increasingly important to be looking at ESG in your fixed income portfolio.”
For fixed income specialist TwentyFour Asset Management, an elegant solution to this growing challenge is a sustainable multi-sector credit strategy that has active ESG analysis at its core and is specifically designed to meet the challenges faced by the institutional market – a product the managers say has the aim of delivering higher yields, the opportunity for capital growth, and credible sustainability qualities.
Typically, the fund is expected to hold about 150 different credit positions, which TwentyFour argues will allow its 15-strong team to monitor each security closely. The intention is to be highly selective and to play the long game, aiming to buy credit positions and hold them to maturity.
Co-manager Eoin Walsh says more institutions are seeking long-term products like this. “There is a demand in the institutional and pension space for funds that have a longer horizon,” he explains. “The idea is that if you stay invested in credit over the longer term, it will give you a better return. In our experience, that has certainly been the case.”
Walsh and fellow co-manager Gary Kirk are eager to emphasise the fund’s flexibility; it will retain no fixed allocations to sectors or geographies. However, the managers envision asset-backed securities (ABS) as playing a major role in the new fund, leveraging the expertise of TwentyFour’s dedicated ABS team and recognising the complexity premium inherent in the asset class. Likewise, the fund will likely retain material exposure to the banking sector, given their strong appraisal of the industry’s fundamentals and the higher yielding products available here, such as Additional Tier 1 (AT1) bonds.
The unprecedented nature of the Covid-19 crisis and its subsequent policy responses have driven the fastest economic cycle in history, says Kirk, with markets progressing from late cycle through recession and into recovery within the space of two years.
Opportunities from volatility
“Right now, the tighter credit spreads look like we are in late cycle again, but really, I think we are still mid-cycle,” he says, adding that the combination of tighter credit spreads and yield scarcity caused by a continuing loose policy backdrop “makes markets a little nervous.”
However, for Kirk, opportunities for yield exist in some of the more esoteric corners of fixed income markets.
“Investors can achieve additional yield by targeting assets that are slightly less liquid. Less liquid does not have to mean they have worse credit metrics” he emphasised. “It does mean they can be more volatile, but I think institutions are prepared to accept some additional volatility to target additional yield. For us, assets historically considered risk-free, namely government bonds, will remain return free for some time.”
For Walsh, in any consideration of volatility, the time horizon of an investment is crucial. “When you have some volatility, there can be periods of a few months where you might underperform, but as long as a manager is selecting the right assets, ultimately clients expect to receive a better return over the lifetime of their investment,” he says.
With a confluence of income, inflation and sustainability challenges facing pension schemes, tackling them together in fixed income allocations will become ever more important. We believe the TwentyFour Sustainable Multi Sector Credit Fund provides a compelling vision of how to meet those challenges.
However, the rapidity of the economic resurgence has inevitably led many observers to predict a spike in inflation and the possibility of more volatile markets as investors try to decipher economic data and central bank messaging. Kirk and Walsh argue this uncertainty is precisely the kind of landscape the firm’s Sustainable Multi Sector Credit Fund is designed to navigate.
“If you are a bondholder, inflation is not your friend,” says Kirk. “The US Federal Reserve says that rising inflation is transient. Are they right, or is this inflation built into the economy? Only time will tell.
“The key question is, will central banks have to play catch up and raise interest rates quickly? If so, does that risk a policy error? We don’t think this is going to be an issue for 2021, but if we are in the same uncertain situation going into 2022, then we would expect to see periods of volatility.”
However, the manager declares: “We welcome the sort of broader volatility that is caused by general market anxiety rather than anything to do with credit fundamentals. That is what allows us the opportunity to buy our favoured assets at more attractive levels.”
With a confluence of income, inflation and sustainability challenges facing pension schemes, tackling them together in fixed income allocations will become ever more important
The search for income, the need for risk-adjusted returns and the growing demand for sustainable investments has made institutional investing more challenging. Fund managers Gary Kirk and Eoin Walsh explain why a new type of sustainable income solution is needed
Alistair Wilson, head of institutional investment at TwentyFour
There is no point spending all your effort on ESG for equities when it’s increasingly important to be looking at ESG in your fixed income portfolio
“A lot of pension schemes are still underfunded and looking for returns, but they need to do that in the lowest risk way they can,” he explains. “That means moving out of equities and into fixed income. There is no point spending all your effort on ESG for equities when it’s increasingly important to be looking at ESG in your fixed income portfolio.”
ncome remains a scarce commodity in today’s markets. Large-scale intervention by governments and central banks in 2020
Gary Kirk and Eoin Walsh, fund managers, TwentyFour Asset Management
Charlene Malik, portfolio manager, TwentyFour Asset Management
Sustainable integration
The search for income, the need for risk-adjusted returns and the growing demand for sustainable investments are all making institutional investing more challenging. But TwentyFour Asset Management aims to take the long view and ride the wave.
pursuit of risk-adjusted returns
Sustainability, volatility, and the
Eoin Walsh, co-manager, TwentyFour Sustainable Multi Sector Credit Fund
Today’s inflation/volatility-led uncertainty is precisely the kind of landscape the Sustainable Multi Sector Credit Fund is designed to navigate
icons/images for each point
in uncertain times
Delivering sustainable yields
Approval of assets comes only once there is unanimous approval from all members of the fund management team
ESG will drive asset performance, particularly among institutions that have to stand up and be accountable to their members
In the long run ESG will drive asset performance, particularly among institutions that have to stand up and be accountable to their members
Returning Income
VS
37.7%
Strategic Income
34.77%
TwentyFour Sustainable Multi Sector Credit Fund Overview
GOAL
CONCEPT
HOW
OUTCOME
Aims to provide an attractive level of income along with an opportunity for capital growth whilst meeting specific ESG metrics
Seeks to find the best credit opportunities from around the globe in one actively managed portfolio
Harnesses our bespoke ESG capabilities, including our proprietary Observatory system
Risk reduction through a broad armoury of hedging tools
An unconstrained, unleveraged, long only credit fund incorporating TwentyFour's bespoke ESG process
Highly focused on relative value from the top down and bottom up
Tolerant of shorter term volatility and lower liquidity to enable targeting of higher income opportunities
Enables the fund to provide an attractive level of income throughout the economic cycle which can be enhanced by our bespoke sustainable approach
TwentyFour applies an integrated approach to ESG investing across all of its strategies, assessing sustainability issues in tandem with more typical financial risks.
For the firm’s Sustainable Multi Sector Credit Fund the process starts with a negative screen, which removes from consideration investments in countries deemed to have poor ESG records. It also screens out investments in ‘sin’ industries: tobacco manufacturers, the arms industry, alcohol producers, carbon intensive industries, and gambling companies, for example
These measures are standard exclusions, and TwentyFour argues that they make little difference to portfolio returns, based on a five-year simulated test. However, subsequent stages of the company’s ESG process are more complex and, ultimately, designed to be additive to sustainable goals.
TwentyFour uses a third-party provider, Asset4 to asses investment ESG credentials, but it emphasises that while this input is a valuable tool, it is not the end of the story or the team’s analysis.
Delivering sustainable investments
The managers’ top-down approach is directed by TwentyFour’s firm-wide monthly Asset Allocation Committee, in which the managers of the TwentyFour Sustainable Multi Sector Credit Fund take an active role. The Committee formulates a macro view by considering global data, central bank policy, and the outlook for credit and rates. The fund’s managers apply this top-down view to the portfolio, assessing yield curves, credit quality and interest rate durations to adjust the fund’s geographical and sector weightings to present market conditions.
Constructing the portfolio
* Integrated approach is based on the Strategic Income Strategy representative portfolio. The companies identified above do not represent all securities held and should not be seen as investment advice or a personal recommendation to hold the same or similar. No assumption should be made as to the profitability or performance of any company identified or security associated with them. The positions detailed above are as at the date below and may or may not represent a position held at any other point. Source: TwentyFour. April 2021
2: ‘ESG: What makes 34…our chosen score?’, blog post, 20 May 2021.
Fund managers Gary Kirk and Eoin Walsh on how the TwentyFour Sustainable Multi Sector Credit strategy aims to meet the uncertainty of today’s market AND match investors’ sustainability expectations
Market cycles | Fund performance | Asset selection Portfolio construction | Measuring sustainability
How the TwentyFour Sustainable Multi Sector Credit Fund is designed to meet the challenges of a post-pandemic, sustainability-focused market.
Asset4’s scores are integrated into TwentyFour’s proprietary relative-value database, Observatory. All investments in the firm’s sustainability fund range are required to achieve a minimum score of 34 out of 100, based on a combination of Asset4’s data, further internal work on controversies and TwentyFour’s active analysis of ESG risks. Portfolio managers also have the discretion to apply further criteria, and frequently do.
“We think that in the long run ESG will drive asset performance, particularly among institutions that have to stand up and be accountable to their members,” says Kirk. As with their experience of traditional credit risks, the unanimous approval of the whole portfolio management team is required to set the seal on each investment.
The extraordinary events of the last year have left capital markets in a highly uncertain state. At the same time, the rising importance of sustainability for institutional investors has added a further layer of challenge and complexity to risk management and asset selection.
TwentyFour believes its Sustainable Multi Sector Credit Fund is well-placed to meet these challenges and help institutions match the expectations of their customers and beneficiaries.
Why Sustainable Multi Sector Credit?
Operating in an uncertain market makes discerning asset selection even more vital. The TwentyFour Sustainable Multi Sector Credit Fund’s emphasis on high conviction allocations is intended to address these concerns through an approach unconstrained by conventional fixed income benchmarks. By combining top-down macro analysis and bottom-up credit work, the managers aim to find the best fixed income opportunities from across the globe.
Sustainable asset selection
Similarly, TwentyFour Asset Management’s incorporation of ESG criteria includes both top-down and bottom-up analysis. As well as scrutinising the qualities of individual bond issuers, the managers will exclude any investments in countries where governance is deemed poor or where significant environmental, human rights or other issues pose an ESG risk. This framework encapsulates all issuers, whether sovereign or corporate (see box, above).
As part of the fund’s constant monitoring, such matters will be always under review, but examples of countries currently ruled out for investment include Saudi Arabia, China and Russia.
While the fund is not limited by being tied to a specific benchmark, the portfolio will operate within some broad sectoral and geographic limits. The fund’s universe includes emerging markets, which can account for up to 20% of the portfolio, while financials can account for up to 50%, as can asset-backed securities (ABS).
Fund benchmark
Kirk emphasises the importance of testing the robustness of every specific asset, with 18 managers applying TwentyFour’s ESG screening process and analysing key credit metrics. A crucial element of asset selection is company engagement. Portfolio managers will meet with the issuers in every investment case. Approval of assets comes only once there is unanimous approval from all members of the fund management team.
Active engagement
Negative Screen (carbon intensive)
Negative Screen (gambling)
ESG score less than 34 due to recent issues (governance concerns due to favourable treatment to shareholders over bondholders)
ESG score less than 34 due lack of information and company unwilling to provide
Negative Screen (alcohol)
Country of risk does not meet ESG requirements
*
Issuers
Integrated approach*
At the same time, sustainability has become the most significant single strategic issue facing asset managers and institutional investors, driven as much by investor demand as by regulatory interventions.
The global COVID-19 pandemic has left capital markets facing radical uncertainty. As a result, The most dramatic interruption to economic activity in living memory has been followed by the fastest recovery – at least in asset values.
T
Against this backdrop, TwentyFour Asset Management has launched the TwentyFour Sustainable Multi Sector Credit Fund, which aims to deliver higher yields by targeting less-liquid credit opportunities and taking a high conviction approach to asset selection. How do the fund’s strategy and approach meet the uncertainty of today’s market while also matching investors’ sustainability expectations?
After an unprecedented year of slowdown, bounce back and rising concerns over inflation, Gary Kirk, co-manager of the TwentyFour Sustainable Multi Sector Credit Fund, describes the current investment environment as “vulnerable” and “disconcerting”. In these circumstances, the search for yield and capital security has become harder than ever, Kirk explains.
“The trajectory is almost certainly going to be for tighter credit spreads given the level of monetary stimulus from central banks and the fiscal stimulus from governments,” believes Kirk. “Spreads have already come tighter in a very short amount of time, and that momentum is a bit disconcerting.
“Another uncertainty is that the market is saying inflation is going to be a problem because of pent-up demand. But maybe that pent-up demand is not going to meet expectations because of the pandemic’s potential impact on the psychology of consumers. So, despite a high savings rate, which ordinarily would indicate a potential tsunami of purchasing power, it is possible an apparently elevated savings rate becomes the new norm.”
Kirk says the TwentyFour Sustainable Multi Sector Credit Fund will be well-suited to facing these unknowns. The team’s strategy will be to take long-only positions, targeting those credit assets that can deliver higher income over the longer term – in effect riding out the potential volatility.
Riding the market cycle
The current market investment environment is vulnerable and disconcerting
dramatic interruption to economic activity in living memory has been followed by the fastest recovery – at least in asset values.
