Meet RWC Partners’ new Diversified Return Team and find out how they are helping investors diversify their portfolios
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Focus is a publication that brings you face to face with a selection of the most in-demand asset managers in the UK and across Europe.
© 2019 Incisive Business Media (IP) Limited
Recent years has seen an shift towards alternatives, as investors seek to diversify their portfolios in the face of these uncertain times.
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This eBook is an Incisive Works product © 2019 Incisive Business Media (IP) Limited
Focus is a publication that brings you face to face with a selection of the most in-demand asset managers in the UK and across the globe.
Investment is subject to risk, including the possible loss of the money invested. Diversification does not ensure a profit or protect against a loss. Past performance is not a reliable indicator of future results. Currency movements can affect your investment returns. For more detailed information about the NN (L) Multi Asset Factor Opportunities fund, please refer to the prospectus and Key Investor Information Document available at www.nnip.com. This is a communication issued by NN Investment Partners B.V. (the “Company”), a Dutch limited liability company registered as an overseas company (registration number FC032623) and as a branch (registration number BR017698) in the register of companies for England and Wales, with its registered address at 25 Old Broad Street, London EC2N 1HQ. The Company is authorised by the Netherlands Authority for Financial Markets and subject to limited supervision by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. The research by AF Advisors has been prepared independently without influence of NN Investment Partners. NN Investment Partners cannot be held liable for the accuracy, correctness or completeness of the content thereof. The full report of AF Advisors ‘NN Investment Partners Multi Asset Factor Opportunities, Peer Group Analysis, June 2019’ can be downloaded from the website mafo.nnip.com.
Important information
IN THIS EDITION
CAPITAL: All investors should consider the risks that may impact their capital, before investing. The value of your investment may become worth more or less than at the time of the original investment. The Fund may experience high volatility from time to time. CONCENTRATION: Concentration of investments within securities, sectors or industries, or geographical regions may impact performance. CREDIT: The value of a bond may decline, or the issuer/guarantor may fail to meet payment obligations. Typically, lower-rated bonds carry a greater degree of credit risk than higher-rated bonds. CURRENCY: The value of the Fund may be affected by changes in currency exchange rates. Unhedged currency risk may subject the Fund to significant volatility. INTEREST RATES: The value of bonds tends to decline as interest rates rise. The change in value is greater for longer term than shorter term bonds. BELOW INVESTMENT-GRADE: Lower rated or unrated securities may have a significantly greater risk of default than investment grade securities, can be more volatile, less liquid, and involve higher transaction costs. EMERGING MARKETS: Emerging markets may be subject to custodial and political risks, and volatility. Investment in foreign currency entails exchange risks.
Risks
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What is the most urgent dilemma that investors face? Surely it is the need to pursue attractive rates of return while remaining conscious of risk. Portfolios may soon need to withstand end-of-cycle macroeconomic and geopolitical turbulence. In this guide, we look at one potential solution to these contradictory needs. NN Investment Partners Multi Asset Factor Opportunities (MAFO) fund is an absolute return factor fund that strives for capital growth and low correlation to traditional asset classes in investor portfolios. Willem van Dommelen, head of factor investing at NN IP, and Stan Verhoeven, lead portfolio manager in the factor investing team, explain their reasoning and tell the story of MAFO’s performance since 2016 in the face of Brexit worries, US-China trade wars and market volatility.
NN IP’s Willem van Dommelen and Stan Verhoeven on how investors can look beyond economic uncertainty to target long-term returns
What is the most urgent dilemma that investors face? Surely it is the need to pursue attractive rates of return while remaining conscious of risk. Portfolios may soon need to withstand end-of-cycle macroeconomic and geopolitical turbulence.
In this guide, we look at one potential solution to these contradictory needs. NN Investment Partners Multi Asset Factor Opportunities (MAFO) fund is an absolute return factor fund that strives for capital growth and low correlation to traditional asset classes in investor portfolios. Willem van Dommelen, head of factor investing at NN IP, and Stan Verhoeven, lead portfolio manager in the factor investing team, explain their reasoning and tell the story of MAFO’s performance since 2016 in the face of Brexit worries, US-China trade wars and market volatility.
Important Information
This document is directed only at persons that qualify as Professional Clients or Eligible Counterparties only. Not to be distributed to or relied on by retail clients. The value of an investment and any income from it can go down as well as up and outcomes are not guaranteed. This document is not a solicitation or an offer to buy or sell any fund or other investment and issued by RWC Partners Limited. This document does not constitute investment, legal or tax advice and expresses no views as to the suitability or appropriateness of any investment and is provided for informational purpose only. The views expressed in the commentary are those of the investment team. The RWC Diversified Return Fund (the “sub-fund”) is a sub-fund of RWC Funds (the “Fund”) an open-ended collective investment company with variable share capital established under the laws of the Grand-Duchy of Luxembourg. The Fund and sub-fund are only available in those jurisdictions where and when they have been registered with the appropriate bodies. The latest version of the prospectus of the Fund may be obtained from rwcpartners.com. This document has been prepared for general information purposes only and does not constitute advice on the merits of buying or selling a particular investment. RWC Partners Limited is authorised and regulated by the Financial Conduct Authority.
This material and its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase, shares or other securities. Investing involves risk and an investment may lose value. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed are those of the author(s), are based on available information and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. Except where registered for public sale, Fund units are offered only to qualified or professional investors on a basis that it does not require the registration of the Fund for public sale. The Fund only accepts professional clients or investment through financial intermediaries. Please refer to the latest Key Investor Information Document (KIID), the Fund offering documents for further risk factors, pre-investment disclosures, and the latest annual report (and semi-annual report) before investing. KIIDs are available in the official languages of each country in which the Fund is registered for sale (please visit www.wellington.com/KIIDs). UCITS Funds are authorised and regulated as a UCITS scheme by the Commission de Surveillance du Secteur Financier-Wellington Management Funds (Luxembourg). This material is provided by Wellington Management International Limited (WMIL), a firm authorised and regulated by the Financial Conduct Authority (FCA) in the UK. CAPITAL: All investors should consider the risks that may impact their capital, before investing. The value of your investment may become worth more or less than at the time of the original investment. The Fund may experience high volatility from time to time. CONCENTRATION: Concentration of investments within securities, sectors or industries, or geographical regions may impact performance. CREDIT: The value of a bond may decline, or the issuer/guarantor may fail to meet payment obligations. Typically, lower-rated bonds carry a greater degree of credit risk than higher-rated bonds. CURRENCY: The value of the Fund may be affected by changes in currency exchange rates. Unhedged currency risk may subject the Fund to significant volatility. INTEREST RATES: The value of bonds tends to decline as interest rates rise. The change in value is greater for longer term than shorter term bonds. BELOW INVESTMENT-GRADE: Lower rated or unrated securities may have a significantly greater risk of default than investment grade securities, can be more volatile, less liquid, and involve higher transaction costs. EMERGING MARKETS: Emerging markets may be subject to custodial and political risks, and volatility. Investment in foreign currency entails exchange risks.
RWC Partners recently welcomed three experts in diversification into its team from boutique firm Agilis Investment Management LLP. Clark Fenton, Praveen Kanakamedala, and Charles Crowson will help lead the new RWC Diversified Return Team.
In this guide, we find out what they have planned for the strategy and why diversification is increasingly important for investors.
No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment
such as Brexit and the US-China trade war. But will fretting about headlines help them earn decent long-term returns? NN Investment Partners’ Stan Verhoeven thinks not. He argues investors distracted by short-term events should refocus on long-term return targets by building more diversified portfolios.
THE INTERVIEW
Can bond investors help change the world?
Name xxxxxx xxxx xxxxx xxxxxxx
Inflation outlook
Source: FactSet
Alasdair Ross, Lead Manager - Threadneedle (Lux) Global Corporate Bond Fund Alasdair is Head of Investment Grade Credit, EMEA. Alasdair is lead portfolio manager across various global, euro and sterling corporate credit portfolios including Threadneedle (Lux) Global Corporate Bond Fund, Threadneedle European Corporate Bond Fund, Threadneedle UK Corporate Bond Fund, and is also co-manager on the Threadneedle Credit Opportunities Fund. Between joining the company in 2003 and becoming a portfolio manager in 2007, he was a credit analyst responsible for covering the TMT, utility and energy sectors, as well as the sterling whole business securitisation sector. Prior to joining the company, Alasdair worked at BP plc in a rotation of commercial roles. Alasdair has a first-class honours degree in Politics, Philosophy and Economics from the University of Oxford. He also holds the Chartered Financial Analyst designation.
In March a portion of the yield curve inverted for the first time since July 2007 – and some investors are twitchy. Led by US treasuries, short-term government debt around the world has been offering higher returns than long-term bonds, a trend widely seen as the most reliable sign of oncoming recession. Consensus is hard to find, however. A particularly decisive flattening in the US market in March led Morgan Stanley to issue a warning to its clients. In the opposing camp, JPMorgan Chase’s Jamie Dimon struck a more upbeat note. He believes the yield curve’s value as an indicator has been muddied by the actions of central banks and regulators.
Tap here
(4) It can be difficult to draw a firm conclusion about the green premium across markets and issuers. For some discussion, see Maria Jua Bachelet, Leonardo Becchetti and Stefano Manfredonia, ‘The Green Bonds Premium Puzzle’, February 2019; Suk Hyun, Donghyun Park and Shu Tian, ‘The Price of Greenness’, August 2018; The Climate Bonds Initiative, ‘Green Bond Pricing in the Primary Market’, May 2018.
We saw an area of the market that we thought was underserved
Stan Verhoeven From 2007 to 2011, Stan worked at Kempen & Co as a quantitative analyst and (exotic) derivatives trader. He joined RBS in London in 2011 and moved to PGGM in 2012, where he was responsible for research into alternative risk premia. In 2015, he joined the Factor Investing team at NN Investment Partners, where he develops and manages a broad range of rule-based strategies, in addition to being Lead Portfolio Manager of MAFO. He is a CFA charterholder and holds an MSc in Business Administration from Radboud University, Nijmegen.
Diversification in any portfolio is most critical in uncertain times. But investors need to focus on the effect any additional investment has on their existing portfolio, rather than simply making sure that any new fund they add is diversified in itself. Traditional investor portfolios are often already biased towards long equity and fixed income. Multi-asset funds shouldn’t add to those concentrations. Instead, Verhoeven argues that multi-asset funds should be portfolio “building blocks” that target attractive absolute returns, on the one hand, and diversification in relation to traditional investments, on the other. “So we make sure our Multi Asset Factor Opportunities (MAFO) fund has no long bias towards equities”, he says, or indeed towards fixed income or any other asset class.
Building blocks
MAFO trades a breadth of assets including commodities – an asset class outside the stamping ground of most traditional multi-asset funds. The nice thing about commodities, says Verhoeven, is that while equity markets are dominated by speculators, commodities markets attract additional participants such as producers managing risk and end consumers. In effect, MAFO, through investing, provides services such as market liquidity, to these participants and receives a return compensation for facilitating this. MAFO doubles up on diversification by applying multiple factor strategies across the various asset markets based on value, momentum, carry, flow and volatility. Factor strategies often have low correlations to traditional investments and low correlations to each other. “If you have one strategy with a Sharpe of 0.25, that may not sound amazing, but if you can create 16 of those with zero pairwise correlations your portfolio would have a Sharpe of 1,” says Verhoeven. Of course, MAFO can feel short-term pain from market ups and downs, with Verhoeven citing energy market volatility in November 2018 as a recent example. But over the longer term, he says, its returns should not be dominated by specific market or geopolitical events. Other segments of the alternatives industry such as hedge funds do access the same markets as MAFO but lack its transparency. “Our strategies are the opposite of a black box: we show a lot of detail about what we are doing and why, which a typical hedge fund will never do”, Verhoeven says. The goal is that investors can place MAFO in their portfolios and understand what might happen.
Doubling up diversification
To explain his investment process, Goodman describes what happened after he first set out the fund’s criteria to Wellington’s broader credit teams. “I soon got an email from an analyst who had identified a really interesting high-yield issuer: a company in Brazil that provided clean water and better sanitation,” Goodman explains.
Identifying impact
Impact bond investing is the segment of sustainable investing that channels debt market capital towards solving these challenges. The size of global debt markets means that impact bonds could be a huge lever for change, says Campe Goodman, who manages Wellington’s first impact bond fund.
Boston-based Goodman says that impact investing should address three categories of urgent global challenge:
• Life essentials, e.g., access to basic needs such as clean water and housing • Human empowerment, e.g., education, financial inclusion and bridging the ‘digital divide’ • Protection and improvement of the environment, e.g., through renewables and recycling
Planetary priorities
Mission to measure
Goodman thinks investors need KPI information to steer capital in the most beneficial direction. “If I were to put $100m in a particular investment, what impact would I get and how would I compare that to other investments?” he asks.
At the moment, issuer reporting varies in form and quality. “Building common standards and ways to report KPIs is Challenge Number 1 and could help the market grow,” Goodman says.
KPIs will also reassure investors. “The fear of greenwashing is a bigger challenge to impact investing than the limited scale of the greenwashing itself,” he says. Most greenwashing issues can be solved by thoughtful managers who look hard at what they are buying, including using KPIs. “So we will work with issuers to create KPIs,” he says, “but if no credible KPIs result, our fund will disinvest.”
Other segments of the alternatives industry such as hedge funds do access the same markets as MAFO but lack its transparency. “Our strategies are the opposite of a black box: we show a lot of detail about what we are doing and why, which a typical hedge fund will never do”, Verhoeven says. The goal is that investors can place MAFO in their portfolios and understand what might happen.
The team checked the firm against the fund’s key criteria – impact theme, additionality and KPI measurability – and added the firm to the fund’s universe of possible investments. That’s the first hurdle for an issuer.
Then when Goodman began selecting high-yield issuers for his portfolio, he spotted the water firm’s “great risk/reward and investment characteristics”. So he double checked with the credit analyst and ran the idea past one of Wellington’s experienced emerging markets portfolio managers, before sizing and sourcing the investment.
For Verhoeven, the real success is that MAFO achieved this while demonstrating low correlation with equity markets.** Uncertain times, he argues, are precisely when successful investors should turn off their newsfeed and focus on engineering portfolios to make long-term returns.
Finding liquid alternatives when fixed income has turned into ‘fixed loss’
market outlook
But how can funds like Goodman’s prioritise and measure the impact of investments? And can bond investors help solve social and environmental problems without sacrificing returns?
Goodman, who has contributed to community services around Boston for more than 20 years, is particularly passionate about human empowerment. (2) But he argues that impact investing also demands rigour.
To be selected for Wellington’s new fund, an investment must address one of Goodman’s three impact categories and be ‘additional’ in that the impact can’t be easily achieved in other ways.
Critically, the bond’s impact on the world must be measurable through a quantitative key performance indicator (KPI), such as the amount of CO2 or methane emissions avoided, the percentage of charity care provided by hospitals, or the units of additional affordable housing constructed.
Everyone supports the drive for clean water, but some other impact areas are more controversial. “We’d like to help fund the transition of ‘dirty’ industries like metals and mining towards more environmentally-friendly practices because we think that could be incredibly impactful,” says Goodman. But his experience with energy utilities highlights a problem.
“A lot of utilities are issuing green bonds for their wind power,” he says, “but only some are actively shutting down thermal activities and moving towards wind and solar.” Impact investors must be selective. “We want to buy the bonds of firms making a real transition,” he says.
In other industries, he says, it can be even more of a challenge to try to make sure “we aren’t providing any capital to negative impact activities at all.” The answer may be future innovation in the form of ‘transition bonds’ structured to meet a high bar of transparency and sustainability goals. (3)
Creative controversy
Must fixed-income investors necessarily sacrifice returns in order to support impact bonds? No, says Goodman, citing two arguments:
He fears negative thinking might slow the flow of capital to critical projects. Goodman hopes to build a track record of strong returns and measured impact that changes the sceptics’ minds.
Sidestepping sacrifice
• All investors constrain themselves in some way. “We’re focusing on issuers providing services and goods such as alternative energy that will be in demand in the future,” he says. • Green bonds, and other bonds in Wellington’s impact universe, do not seem to trade at a substantial premium, in Goodman’s experience, though empirical evidence is mixed. (4)
However, Goodman is worried about one thing: “I’m amazed at the number of sceptics who still think impact funds will fail to make an impact and fail to make returns,” he says.
Building belief
(2) See Goodman’s biography in Fund Q&A for details of his recent community service work.
No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment.
We want to buy the bonds of firms making a real transition
Campe Goodman, portfolio manager, Wellington Management
(3) For example, see discussion in Tom Freke, How ‘Transition Bonds’ Can Help Polluters Turn Green, Bloomberg Businessweek, 14 July 2019: https://bloom.bg/2lFwh4k
uncertainty
quantitative easing, a possible bear market in equities, and geopolitical events such as Brexit and the US-China trade war. But will fretting about headlines help them earn decent long-term returns?
or the next couple of years, uncertainty is king. Investors are worrying about the end of the economic cycle and
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equity and bond holdings.
hen Clark Fenton launched Agilis Investment Management LLP in 2017, he wanted to offer the market something he believed it was lacking: A liquid, low-cost, transparent way for investors to gain true diversification from traditional
W
His vision was a product that finally provided those customers that had been continuously let down by the alternatives with what he felt a fund that was sophisticated, yet simple enough that investors could easily understand how it fits in their portfolios.
“We saw an area of the market that we thought was underserved, one where investors were seeking to get more diversification from portfolios but had been let down by alternatives because of high costs, lack of transparency or illiquidity,” he said. “We wanted to create a product that fulfilled these objectives.”
Together with partners Charles Crowson, who boasts derivatives experience, and Praveen Kanakamedala, who has strong risk management knowledge, Fenton brought the Protea fund – Agilis UCITS to market with a flat management fee, no performance fee and offering daily liquidity in a UCITS wrapper.
The multi-strategy portfolio invests across equity, interest rates, credit, commodities, FX and volatility strategies to generate alternative return streams, and can go long or short using derivatives, which allows it the flexibility to adapt to different market conditions.
After two years of running their strategy under the Agilis brand, the three-strong team has now joined RWC Partners to form its Diversified Return Team, with the fund merged into the RWC Diversified Return fund.
“We think this offers us the best of both worlds in terms of providing an opportunity to build the business with the backing of a great partner, strong sales and marketing,” said Fenton. “As a standalone business, these were the things we were lacking, and we wanted to bridge that gap.”
Why diversification?
But while the team and the fund are getting a new name, the strategy will remain exactly the same, targeting diversification first and foremost, but achieving this in a conservative way, with the aim to produce less than half the volatility of equity markets.
And the data proves the fund has been able to do just that since inception: it boasts a beta of just 0.08 to the MSCI All Country World index and 0.16 to the Barclays Global Aggregate Bond index (see table, below).
This low correlation means the fund is not overly biased towards bull or bear markets.
Fenton believes his offering to be “something beyond basic asset allocation”, at a time when the diversification benefits of fixed income are becoming “more questionable” or come at “a higher cost in terms of returns foregone”. For example, much of the European bond market offer negative yields“
It is no longer fixed income – it’s fixed loss,” Fenton said. “For investors who would have historically relied on that for diversification and liquidity it’s a much less compelling proposition.”
To achieve its objective, the RWC Diversified Return fund takes advantage of alternative income streams and uses derivatives to mitigate risks – a strategy that proved its worth in a year like last year, when it made money while most other assets went down in unison.
The focus on liquidity and making money when markets go down means the fund may not perform as well as competitors in a bull market, as Fenton explains the strategy is “almost by definition too early, because we cannot afford to be late”.
“People who are going to try to keep dancing while the music plays and think they can get out quickly when it stops are probably deluding themselves in today’s liquidity environment,” he said. “The next sell-off should be where we distinguish ourselves the most.”
Transparency
Demand for alternative assets has been growing strongly over recent years, with total assets in alternative mutual funds and ETFs increasing from $136bn in 2008 to $913bn by 2017, according to Morningstar.
But while recent market volatility has forced even more investors to look for alternative sources of return, much of the money has been going into less liquid vehicles such as hedge funds, as well as quantitative and systematic strategies.
These often come at a transparency cost, according to Fenton: “It can be hard to know what the secret sauce is and there is a bit of a leap of faith involved.”
For Fenton, it is particularly important to ensure the fund is “not a black box”, so the number of strategies in the portfolio is kept to a manageable 8-12 themes, and the team reveals all holdings to its clients.
“It is a portfolio you can get your hands around, in half an hour we can talk about all the themes,” Fenton said.
“The derivatives aspect is the most complicated one, but the way we use them is targeted. We don’t use exotic derivatives and we don’t favour complexity for its own sake.”
Diversification
Fund/index
Beta
Correlation
MSCI All Country World Index (ACW) USD
Barclays Global Agg Bond Index USD
0.08
0.16
0.33
0.21
Source: RWC, Agilis Investment Management, 30 September 2019.
Justin Craib-Cox, CFA, portfolio manager
RWC Sustainable Convertibles Fund
Davide Basile, RWC, Head of Convertible Bonds Team
Charles Crowson, Praveen Kanakamedala and Clark Fenton, RWC Diversified Return Team
Why diversification matters
RWC Partners’ Clark Fenton on why diversification is vital during these turbulent times
From Made in China to Designed in China
Hyomi Jie takes a closer look at the strategy of successful domestic designer brand JNBY, which is nurturing a growing audience in the affordable luxury market
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RWC
fund launch
Risk target/budget
Base currency
23 March 2016
10% long-term volatility
USD
Source: Columbia Threadneedle Investments at 31 March 2019.
Ahead of the curve: reading the runes on risk
• Value • Momentum • Carry • Flow • Volatility
• Equity • Fixed income • Currencies • Commodities
return objective (1 month US Libor)
+ 6%
KEY FACTS
“All peers realised cumulative three-year returns between 0% and 10%, whereas the NN IP strategy is the only factor-based strategy that yielded substantial returns even given its relatively high volatility.” AF Advisors (2)
NN IP Multi Asset Factor Opportunities
“In summary, NN IP’s relatively lean and mean approach towards alternative risk premia investing enables it to charge lower fees versus its peers, but at the same time it is achieving attractive returns against an acceptable risk. As such, NN IP may be considered an attractive alternative within this segment.” AF Advisors
Fund size (mid-basis)
Value, momentum, Carry, flow, & volatility
5 factors
Investment philosophy
NN (L) Multi Asset Factor Opportunities
Gross returns over relevant risk free rate of NN (L) Multi Asset Factor Opportunities versus direct peers (1)
Factor performance (1)
Source: (1) Morningstar Direct (3 year, May 2019) via AF Advisors. (2) AF Advisors, NN Investment Partners Multi Asset Factor Opportunities, Peer Group Analysis, June 2019
NN (L) Multi Asset Factor Opportunities: Key statistics (2)
Source: (1) NN IP Factor Investing team. As at 30 April 2019. (2) NN IP, Bloomberg. Data from April 30, 2016 – April 30, 2019 and quoted in USD. Equities is MSCI World Net Total Return (NDDUWI) and Fixed Income is the Bloomberg Barclays Global Agg. Government Total Return Index (LGAGTRUU). MAFO refers to NN (L) Multi Asset Factor Opportunities I-share USD (gross of 0.81 bps annualized ongoing charges). The indices mentioned here are presented for the purpose of comparing with equities and fixed income, and should not be considered benchmarks.
Diversified Return Fund
MARKET OUTLOOK
NN (L) Multi Asset Factor Opportunities: Factor performance
Gross returns over relevant risk free rate of NN (L) Multi Asset Factor Opportunities versus direct peers
NN (L) Multi Asset Factor Opportunities: Key statistics
Source: NN IP Factor Investing team. As at 30 April 2019.
Source: Wellington Management as at 30.06.2019. For illustrative purposes only.
Correlations of NN (L) Multi Asset Factor Opportunities and direct peers vs equity and fixed income benchmarks
Source: AF Advisors calculations based on Morningstar Direct data (3 year, May 2019).
Source: AF Advisors, NN Investment Partners Multi Asset Factor Opportunities, Peer Group Analysis, June 2019.
Source: AF Advisors, NN Investment Partners Multi Asset Factor Opportunities, Peer Group Analysis, June 2019
“All peers realised cumulative three-year returns between 0% and 10%, whereas the NN IP strategy is the only factor-based strategy that yielded substantial returns even given its relatively high volatility.” AF Advisors
FACTORS
ASSET CLASSES
5
4
(Gross)
FUND TYPE
11 (currently invested in 10)
IMPACT THEMES
Global Impact Bond
30 April 2019
INCEPTION DATE
Strategy launched in 2017
Bloomberg Barclays Global Aggregate, hedged to US Dollar Index
REFERENCE BENCHMARK
Government, agency, supranational, municipal, corporate and securitised
SECTORS / ISSUERS
Exposures
Top themes by size
Our investment themes
Wellington has identified 11 areas of pressing social and environmental need, grouped under three categories, where we believe a real impact can be made. These themes are broadly aligned with the United Nations’ Sustainable Development Goals (SDGs).
Digital divide
Education and job training
Financial inclusion
Safety and security
HUMAN EMPOWERMENT
Human empowerment
Environment
Life essentials
Affordable housing
Clean water and sanitation
Health
Sustainable agriculture and nutrition
ENVIRONMENT
Alternative energy
Resource efficiency
Resource stewardship
LIFE ESSENTIALS
Data shown as of 2018. This work is illustrative of research carried out by Wellington Management. Developed on an issue by issue basis, leveraging, company/issue reports, publications and data-bases. The examples shown are presented for illustrative purposes only and are not to be viewed as representative of actual holdings. It should not be assumed that any client is invested in the (or similar) example, nor should it be assumed that an investment in the example has been or will be profitable. Actual holdings will vary for each client and there is no guarantee that a particular client’s account will hold the examples presented. Source: company/issue reports
Measuring impact in fixed income – illustrative examples
Campe works with a seven-strong team based in Boston and London. The team includes specialists in fixed income and ESG analysis, taking full advantage of Wellington’s wider resources, including expertise in investment grade credit, emerging markets debt and local agency debt.
Meet the RWC Diversified Return Fund Team
BOSTON
LONDON
Marc Piccuirro, CFA
Jennifer Rynne, CFA ESG analyst
Campe Goodman, CFA portfolio manager
Virginie Pelle
fixed income portfolio manager
fixed income credit analyst
Quantitative Analysis and Risk Management
Praveen Kanakamedala
Meredith Joly
investment specialist
IMPACT
0.022% of annual global CO2 emissions avoided.
OUTCOME
7,434,091 metric tons of CO2 equivalent avoided.
OUTPUT
13,957,000 MWh of clean energy produced.
ACTIVITY
Allocate 81% of proceeds to wind and solar energy production projects and 19% to projects that improve efficiency in transportation.
ISSUER
European green bond
0.0031% of cost-burdened households provided with affordable housing at the national level.
Affordable housing stock increased by 0.45% on average by state.
644 affordable rental units constructed.
Mortgage loan issued to provide financing for construction of multi-family rental property.
Low-income multi-family rental property
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Asset class exposure
Based on the credit cycle framework and current market conditions we rolled from equities to credit
Consistent protection against largest recent equity sell-offs
Bond like volatility despite turmoil in equity markets
Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors maynot get back the full amount invested. The Protea Fund – Agilis UCITS merged with the RWC Funds-RWC Diversified Return Fund on 28th October 2019.
The Protea Fund – Agilis UCITS performance is measured as the weekly return of the Class A USD share class beginning on 10 October 2018. When calculating the statistics, the performance of MSCI World and Barclays Global Aggregate indices are measured over the same frequency and time periods as the Protea Fund – Agilis UCITS Class A USD.
Explaining the credit cycle
The credit-cycle framework is the principal tool the Diversified Return Team use to guide how much and what sort of risk to take in their fund. The framework is not a basic asset-allocation but a portfolio-construction methodology to help ensure that the risks in the fund are consistent with those observed in financial markets. We believe the credit-cycle is extra informative in today’s highly “financialised” and debt-fuelled economy.
Prior to joining RWC, Praveen managed Operations, Risk and Compliance for Agilis. He was previously the Global Head of Risk Management and Chair of the Risk Committee at Permal from 2013 to 2015. Praveen was also a member of the Permal Risk, Compliance and Operations Committee and helped oversee the re-domiciliation of the firm’s US$ 9.4 billion single manager ICAV platform to Dublin. He was previously Head of Risk Management at Fauchier Partners between 2007 and 2013. Before Fauchier, Praveen was at Harris Alternatives, a Chicago-based investment firm, where he was responsible for building risk-management tools and hedging market risk in the portfolios. Praveen has an MS from Illinois Tech and an MBA from the University of Chicago.
Clark joined RWC to manage the Diversified Return Fund which he began at Agilis Investment Management. He founded Agilis in 2017 and served until October 2019 as the CEO and CIO. He is the former co-Chief Investment Officer of Permal, a multi-manager alternative-investment firm. Clark joined Permal after its purchase, in March 2013, of Fauchier Partners, where he had been the Chief Executive Officer, responsible for business strategy and management. He also oversaw strategy allocation, manager selection and portfolio construction as a member of the Investment Committee. Previously, Clark worked at Morgan Stanley and began his career trading fixed-income securities for Montgomery Securities in San Francisco. Clark has a BA from Georgetown University’s School of Foreign Service and an MBA from the University of Michigan.
Head of Diversified Return Fund
Clark Fenton
Charles joined RWC from Agilis Investment Management in October 2019 to continue managing the Diversified Return Fund. He previously ran the London office of Mason Capital Management, where he worked for ten years. His role involved trading event and special situation strategies across equity, equity derivatives, credit, and fixed income. Prior to this he had trading roles at Elgin Capital and Tisbury Capital. Charles started his career in the equity derivatives department at JP Morgan. Charles has an MA in History from the University of Cambridge.
Portfolio Manager
Charles Crowson
Credit Protection
Volatility Strategy
US Treasury Notes
Gold
S&P Calls
Semiconductors
Uranium
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Looking beyond
Name xxxxxx xx xxxxxxx
The factors we employ have three distinct drivers of return
How can your fund protect investors in a downturn?
We adapt to different market conditions using our four-part credit cycle framework
In short, two objectives: strong financial returns and addressing some of the world’s social and environmental challenges through impact investments.
For us, those challenges fall into 11 themes, divided into three major groups. First, life essentials, which covers things like clean water and sanitation, health, affordable housing; second, human empowerment, which includes improving education, financial inclusion and bridging the digital divide; third, protection and improvement of the environment, which includes alternative energy, recycling and renewable resources, broadly speaking.
We developed these themes prior to the development of the UN SDGs (1) and have stuck with them because we think our themes capture what is investible. They’ve resonated with clients and we wanted to keep some consistency in what we’ve done. We’ve also mapped every issuer that we have in the portfolio to one or more of the specific sub-goals under one of the 17 UN SDGs – so there’s no problem showing clients how the portfolio aligns with the UN SDGs.
How do those themes relate to the well-known United Nations Sustainable Development Goals?
It’s a two-step process. We identify the issuers and create our universe of impact issuers – setting a high bar. Then from that universe, we construct the portfolio that we think is going to have the risk/return characteristics we are looking for.
How do you select investments for the fund?
But we lost out in November on the back of a spike in natural gas prices early in the month and later a huge drop in energy prices. So in Q4 overall we went down, like a lot of funds, but actually not in the same months as equity funds. That’s the big message: we’ve outperformed our target over the full three years while demonstrating low correlation with equities.
Seven of us work on this approach, including two lead portfolio managers. I’m responsible for the overall direction of the portfolio and for every buy and sell decision. But we take full advantage of Wellington’s resources, including talking to almost all of the credit analysts and a number of specialist portfolio managers. So when we want to know what impact bonds are available to us in emerging markets, for example, we speak with our entire team of emerging market specialists.
How do you find the best impact investments?
Our focus on simplicity enables us to understand the sources of return (factors) that we harvest and what risks they entail. Our approach is built on a robust research process whereby we regularly re-evaluate our strategies to ensure we are not dogmatic.
The individual factors we apply have proven their worth in practice over the longer term and are here to stay. As mentioned earlier, they pick up different sources of returns and hence are uncorrelated to each other (and to traditional investments). So what drives the ability to target absolute return is the positive expected return of factors over the long term and their low pair-wise correlations.
So what drives that ability to target an absolute return, beyond diversification benefits?
In case factor A does not perform in period X then, since factors are relatively uncorrelated and have long-term positive expected returns, it is likely that factors B and C will perform - so on a net basis there is an absolute return.
MAFO is built on active research to find, assess and review the factors used in the model. We implement the model on a daily basis to optimise its performance. The real point is that factor investing must be systematic: the strategy should deliver the exact same thing in the future as in the past, given the same market environment. Markets never stay the same, of course, but the contrast with traditional discretionary managers is clear: they can change their opinion and react quite differently to similar markets.
So is factor investing passive or active?
There are three key steps to imposing discipline. Every factor strategy we include in our portfolio must have a clear and strong economic rationale and academic underpinning; must have proven itself over the long run, in and out of sample and across asset classes; and must offer attractive returns taking into account implementation costs.
Is a disciplined approach easy to build given that the growing number of factor approaches include some that seem spurious or that side-step real-world issues, e.g., implementation costs?
You do have to build a rigorous research process – and you do have to stick to it!
OUR RESEARCH PROCESS
Idea generation
Data collection
Testing base model
In-depth research
Implementation
Periodic review
Fully systematic process
Investment process
Efficient implementation and execution
Detailed risk monitoring and reporting
Dedicated factor investing team MAFO is managed by NN Investment Partners’ factor investing team. The seven-strong team of portfolio managers combines quantitative research and portfolio management, working closely with NN IP’s trading team and the centralised innovation and data team. They are led by Willem van Dommelen and Stan Verhoeven.
Click for van Dommelen’s view
One of the big problems in the UK and other developed countries is insufficient affordable housing. UK housing associations are a great way to address that so we’ve been buying bonds issued by some of them. Likewise, we invested in a quasi-governmental transportation authority in the UK that issued a green bond to make improvements to train capacity in a major urban centre, and to expand hybrid buses and create more cycle lanes.
Can you give examples of your impact investing in the UK?
One of the most straightforward is metric tons of CO2 and methane emissions that have been avoided. That’s generally a good KPI for clean energy. Other KPIs include units of affordable housing created or, for hospitals, dollars of charity care provided, or the number of people provided with clean water.
What key performance indicators (KPIs) do you use to measure impact?
I’d say there isn’t any skew in the universe of impact bonds that makes it either riskier or less risky than the whole universe of bonds. There’s a range of high-quality impact bonds available – including quality sovereigns and multi-nationals – that provide really great protection in a negative cycle environment. Then there are more risky investments that are great to have in an early or mid-cycle environment. So we feel we’re able to position the portfolio right now as defensively or as aggressively as we want to.
Is there any reason to think impact investing is risky this late in the economic cycle?
First, we’re seeing more issuers, and we’re also seeing more issuers figuring out how to package some of their activities as impact investments. So the supply of investment opportunities is growing, though I’d love to see it grow even faster.
How will impact bond investing evolve over the next 3-5 years?
Second, demand is growing. I’ve been doing fixed income investing for 20 years and, even five years ago, nobody was talking about impact bonds. Absolutely nobody. The growth of interest is amazing.
But because global needs are so great, the big challenge is to get even more investors coming into the space. Hopefully, if people see strong returns, they’ll gain confidence that they can meet both their investment and their impact objectives.
Third, standards and KPI measurement will evolve over time. We’ve got lots of good ideas but other people will have good ideas as well. We want to be sure our reporting is best in class. One thing that won’t change is our twin goal: generating strong investment returns and having a positive social and environmental impact.
Aligned with select UN Sustainable Development Goals
Wellington Management supports the UN SDGs. Our Fund is currently aligned with 13 of the 17 Sustainable Development Goals set by the UN
(1) See United Nations, 17 Goals to Transform Our World: https://www.un.org/sustainabledevelopment
n this interview with Clark Fenton, head of the new Diversified Return Team at RWC Partners, we delve deeper into the strategy of the RWC Diversified Return Fund and how it aims to make money for investors in all market conditions.
I
The RWC Diversified Return Fund follows a credit cycle framework, which consists of four phases and sees the fund adapt its positioning based on market conditions, with the aim to make money in both downward and upward markets.
How does your fund’s investment strategy allow it to adapt to different market conditions?
We adapt to different market conditions using our four-part credit cycle framework which guides the amount and kinds of risk we take. Based on our credit cycle framework, we are currently in the over-extended leverage phase. Risk premia are low, credit spreads are very tight, corporates have a lot of debt on balance sheets.
If trouble comes, it will be acutely felt. During this phase, we have very little market risk, a lot of liquidity and hedge positions, and instruments that will benefit from a liquidity crunch.
The phase that comes after is deleveraging; markets start to panic and there is a sell-off. We believe our hedge positions should do well in this environment.
The third phase is balance sheet repair, where a lot of the sell-off has already happened but investors are still nervous to add risk. We start to add a bit of risk here, especially carry, to generate some yield for the portfolio, and potentially take profits on our hedges.
Can you offer an example of a position in the fund aimed at protecting investors in a downturn?
The last phase is re-leveraging, where investors come back to markets. At this point we will have the most equity-like exposure, while remaining within our beta constraints.
One such position is being short of credit. Credit quality has gone down. BBB-rated bonds now make up the largest part of the corporate debt investment grade universe.
Spreads are really tight and risks are high as seen, for example, in the very high proportion of covenant light loans, i.e. the loans without the usual stringent covenants.
At the same time, though, mainly due to investors’ complacency the cost to be positioned for a downturn in credit is low. If credit spreads widen, it’s very good news for us.
Also, at this stage in a cycle we generally aim to buy assets that will benefit from a liquidity crunch. This issue has come up recently with the Woodford saga and again with H2O. But these warning signals are appearing in the context of a bull market.
How have you coped with the volatility at the end of 2018?
In the brief sell-offs that we have experienced since inception, the fund has made money. This was due not only to our investments but also to what we avoided.
Not having a lot of risk in the portfolio was helpful, but strategies that benefitted from volatility also did well. For example, on top of credit protection, we have an option strategy related to the equity volatility.
We also held short duration US treasuries, which performed well and the credit and volatility positions: the Federal Reserve lowering interest rates is not great for volatility and credit protection, but treasuries are a direct beneficiary. The same goes for our investment in gold and gold miners.
How do you mitigate the risk of large losses when using derivatives in the portfolio?
The way is by buying options principal to mitigate large losses rather than selling them. One can get into trouble with derivatives selling volatility, for example – if there is a big move in the underlying asset’s price the negative asymmetry of a short option position compounds the losses. As we generally are long volatility, when markets got shakier and shakier in the December sell-off it was better for our fund.
Do you incorporate ESG or sustainability criteria in your investment process?
Yes, we do take ESG into account. For example, with gold miners, where we wanted to avoid political and ESG risks, so we generally looked for companies whose assets were concentrated in North America or Australia. But for much of our portfolio this is not relevant because of the types of assets we are in, and because we invest much more at an index level.
What risks are you watching out for over the next 18 months?
A key one is how much leverage there is in a highly financialised economy, which makes the financial system sensitive to interest rate moves. Another issue that is not getting enough attention is the deficit in the US.
There is a huge amount of federal debt issuance and foreign buyers are withdrawing more and more, so private investors are forced to step in. I wonder if one of the reasons for the Fed to lower rates is to implicitly fund this budget deficit.
Not having a lot of risk in the portfolio was helpful
n this interview with Clark Fenton, head of the new Diversified Return Team at RWC Partners, we delve deeper into the strategy
