Tom Moulds and My-Linh Ngo on impact-aligned debt investing
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.
© 2021 Incisive Business Media (IP) Limited
Can debt investors promote positive change in the world by investing in the expanding ‘sunrise’ industries of a sustainable future rather than the ‘sunset’ industries of our past? If so, where would this approach sit in the ever-broadening spectrum of sustainable investing strategies?
IN THIS EDITION
For professional investors only
READ NEXT
In this Focus, My-Linh Ngo, BlueBay’s Head of ESG Investment, and Tom Moulds, a senior portfolio manager, tell us how they came to design BlueBay’s first impact-aligned debt strategy. The world is in a race against time, and Ngo thinks that an impact-aligned stance could speed up our transition to a low-carbon, more socially responsible society.
Professional Investors only
This document may be prod
© 2020 Incisive Business Media (IP) Limited
This document may be produced and issued by the following entities: in the European Economic Area (EEA), by BlueBay Funds Management Company S.A. (the ManCo), which is regulated by the Commission de Surveillance du Secteur Financier (CSSF). In Germany and Italy, the ManCo is operating under a branch passport pursuant to the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) and the Alternative Investment Fund Managers Directive (2011/61/EU). In the United Kingdom (UK) by BlueBay Asset Management LLP (BBAM LLP), which is authorised and regulated by the UK Financial Conduct Authority (FCA), registered with the US Securities and Exchange Commission (SEC) and is a member of the National Futures Association (NFA) as authorised by the US Commodity Futures Trading Commission (CFTC). In United States, by BlueBay Asset Management USA LLC which is registered with the SEC and the NFA. In Switzerland, by BlueBay Asset Management AG where the Representative and Paying Agent is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. The place of performance is at the registered office of the Representative. The courts of the registered office of the Swiss representative shall have jurisdiction pertaining to claims in connection with the distribution of shares in Switzerland. The Prospectus, the Key Investor Information Documents (KIIDs), where applicable, the Articles of Incorporation and any other documents required, such as the Annual or Semi-Annual Reports, may be obtained free of charge from the Representative in Switzerland. In Japan, by BlueBay Asset Management International Limited which is registered with the Kanto Local Finance Bureau of Ministry of Finance, Japan. In Australia, BlueBay is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of financial services as it is regulated by the FCA under the laws of the UK which differ from Australian laws. In Canada, BBAM LLP is not registered under securities laws and is relying on the international dealer exemption under applicable provincial securities legislation, which permits BBAM LLP to carry out certain specified dealer activities for those Canadian residents that qualify as "a Canadian permitted client”, as such term is defined under applicable securities legislation. The BlueBay group entities noted above are collectively referred to as “BlueBay” within this document. The registrations and memberships noted should not be interpreted as an endorsement or approval of BlueBay by the respective licensing or registering authorities. To the best of BlueBay’s knowledge and belief this document is true and accurate at the date hereof. BlueBay makes no express or implied warranties or representations with respect to the information contained in this document and hereby expressly disclaim all warranties of accuracy, completeness or fitness for a particular purpose. Opinions and estimates constitute our judgment and are subject to change without notice The document is intended only for “professional clients” and “eligible counterparties” (as defined by the Markets in Financial Instruments Directive (“MiFID”) ) or in the US by “accredited investors” (as defined in the Securities Act of 1933) or “qualified purchasers” (as defined in the Investment Company Act of 1940) as applicable and should not be relied upon by any other category of customer. No part of this document may be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, in whole or in part, for any purpose in any manner without the prior written permission of BlueBay. Copyright 2021 © BlueBay, is a wholly-owned subsidiary of RBC and BBAM LLP may be considered to be related and/or connected to RBC and its other affiliates. ® Registered trademark of RBC. RBC GAM is a trademark of RBC. BlueBay Funds Management Company S.A., registered office 4, Boulevard Royal L-2449 Luxembourg, company registered in Luxembourg number B88445. BlueBay Asset Management LLP, registered office 77 Grosvenor Street, London W1K 3JR, partnership registered in England and Wales number OC370085. The term partner refers to a member of the LLP or a BlueBay employee with equivalent standing. Details of members of the BlueBay Group and further important terms which this message is subject to can be obtained at www.bluebay.com. All rights reserved.
This document may be produced and issued by the following entities: in the European Economic Area (EEA), by BlueBay Funds Management Company S.A. (the ManCo), which is regulated by the Commission de Surveillance du Secteur Financier (CSSF). In Germany and Italy, the ManCo is operating under a branch passport pursuant to the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) and the Alternative Investment Fund Managers Directive (2011/61/EU). In the United Kingdom (UK) by BlueBay Asset Management LLP (BBAM LLP), which is authorised and regulated by the UK Financial Conduct Authority (FCA), registered with the US Securities and Exchange Commission (SEC) and is a member of the National Futures Association (NFA) as authorised by the US Commodity Futures Trading Commission (CFTC). In United States, by BlueBay Asset Management USA LLC which is registered with the SEC and the NFA. In Switzerland, by BlueBay Asset Management AG where the Representative and Paying Agent is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. The place of performance is at the registered office of the Representative. The courts of the registered office of the Swiss representative shall have jurisdiction pertaining to claims in connection with the distribution of shares in Switzerland. The Prospectus, the Key Investor Information Documents (KIIDs), where applicable, the Articles of Incorporation and any other document required, such as the Annual and Semi-Annual Reports, may be obtained free of charge from the Representative in Switzerland. In Japan, by BlueBay Asset Management International Limited which is registered with the Kanto Local Finance Bureau of Ministry of Finance, Japan. In Australia, BlueBay is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of financial services as it is regulated by the FCA under the laws of the UK which differ from Australian laws. In Canada, BBAM LLP is not registered under securities laws and is relying on the international dealer exemption under applicable provincial securities legislation, which permits BBAM LLP to carry out certain specified dealer activities for those Canadian residents that qualify as “a Canadian permitted client”, as such term is defined under applicable securities legislation. The BlueBay group entities noted above are collectively referred to as “BlueBay” within this document. The registrations and memberships noted should not be interpreted as an endorsement or approval of BlueBay by the respective licensing or registering authorities. To the best of BlueBay’s knowledge and belief this document is true and accurate at the date hereof. BlueBay makes no express or implied warranties or representations with respect to the information contained in this document and hereby expressly disclaim all warranties of accuracy, completeness or fitness for a particular purpose. Opinions and estimates constitute BlueBay judgment and are subject to change without notice. The document is intended only for “Professional Clients” and “Eligible Counterparties” (as defined by the Markets in Financial Instruments Directive (“MiFID”) or the FCA); or in Switzerland for “Qualified Investors”, as defined in Article 10 of the Swiss Collective Investment Schemes Act and its implementing ordinance, or in the US by “Accredited Investors” (as defined in the Securities Act of 1933) or “Qualified Purchasers” (as defined in the Investment Company Act of 1940) as applicable and should not be relied upon by any other category of customer. In the United States, this document may also be provided by RBC Global Asset Management (U.S.) Inc. (“RBC GAM-US”), an SEC registered investment adviser. RBC Global Asset Management (RBC GAM) is the asset management division of Royal Bank of Canada (RBC) which includes BBAM LLP, RBC GAM-US, RBC Global Asset Management (Asia) Limited and RBC Global Asset Management Inc., which are separate, but affiliated corporate entities. Past performance is not indicative of future results. No part of this document may be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, in whole or in part, for any purpose in any manner without the prior written permission of BlueBay. Copyright 2021 © BlueBay, is a wholly-owned subsidiary of RBC and BBAM LLP may be considered to be related and/or connected to RBC and its other affiliates.® Registered trademark of RBC. RBC GAM is a trademark of RBC. BlueBay Funds Management Company S.A., registered office 4, BoulevardRoyal L-2449 Luxembourg, company registered in Luxembourg number B88445. BlueBay Asset Management LLP, registered office 77 Grosvenor Street, London W1K 3JR, partnership registered in England and Wales number OC370085. The term partner refers to a member of the LLP or a BlueBay employee with equivalent standing. Details of members of the BlueBay Group and further important terms which this message is subject to can be obtained at www.bluebay.com. All rights reserved.
This is a marketing communication. There are several risks associated with investing in this product. Please refer to the prospectus of the fund and to the KIID available on this website before making any final investment decisions.
THE INTERVIEW
Scaling up sustainability:
Name xxxxxx xxxx xxxxx xxxxxxx
Emerging markets were still able to cut rates and stimulate that way
While impact-aligned strategies may not be pure impact investing, they still turn the debt investment selection process on its head, says Ngo. “The first filter for the new impact-aligned strategy is whether a company is providing a product or service that addresses a specific environmental or social problem as defined by seven critical sustainability themes,” she says.
HOME
SNAPSHOT
Q&A
In particular, it’s proving hard for the industry to craft affirmative debt strategies that channel capital not just to responsible companies with high Environmental, Social and Governance (ESG) ratings, but specifically to companies rolling out products and services that support key aspects of sustainability such as enabling the circular economy, building human knowledge and skills, or ensuring clean water.
Creating change
The world is in trouble and we need to shift the pace and scale of change to address this, which means the debt market must play its role,” says My-Linh Ngo, BlueBay’s Head of ESG Investment. Her concern is not only about the urgency of
“
Ngo agrees that secondary debt investors who direct their capital towards sustainability-building activities can’t easily prove conventional additionality. “But you are still allocating capital purposefully to a progressive company and potentially helping to reduce its cost of capital over time, and you can improve its sustainability impact through all the engagement you then have with the company,” she says. The fact that some other debt investor might have supplied equivalent capital should not negate these positives.
Can debt investors help fund the world’s sunrise industries?
“Public debt markets need to help companies that are actively promoting sustainability to scale up, or those companies will forever stay small or mid-cap and we're not going to get the transition we need,” she says. “And if you look at the fundamental overhaul we need in order to decarbonise much of our industry and infrastructure, the type of returns and risk profiles for that is often more suited to the debt asset class rather than equities,” Ngo says.
She argues that companies helping to solve her seven challenges are part of the world’s new ‘sunrise’ industries, as opposed to existing carbon-intensive or socially negative ‘sunset’ industries.
We brainstormed the most important problems facing the world and then built the themes around those
This kind of ‘impact investing’ is conventionally defined in private markets in terms of whether the investment makes a tangible, measurable difference that is ‘additional’, in that it would not have occurred without the investor’s intervention.
Jewell says that BlueBay takes ESG risks into consideration across all its investing, including conventional strategies, but that “our global high yield ESG strategy sets a much higher bar, beyond investment materiality, on how we integrate ESG into the decision making.”
It’s a problem that My-Linh has been exploring alongside Tom Moulds, a senior portfolio manager at BlueBay charged with developing BlueBay’s first impact-aligned debt strategy over the last year or so. The strategy will predominantly invest in liquid, public-market corporate debt and that careful choice of phrase – ‘impact aligned’ – turns out to be critical to how the pair thought through the challenge.
Careful choice
CoCo triggers are normally set well below where we would expect to see the point of non-viability for a banking institution today
MENU
CLOSE
Marc Stacey and James Macdonald, Fund Managers
BlueBay Financial Capital Bond Fund
FUND SNAPSHOT
FUND Q&A
Ngo explains that to qualify for the new strategy, “the company’s core business should be involved in solving for one of our seven environmental and social challenges, for example a drug company solving healthcare issues or an educational publisher solving for a social need. But it wouldn’t cover, for example, a general food retailer that simply cuts down its waste, unless perhaps that retailer is a totally organic food retailer.”
Pragmatic positives
“We try to quantify the extent to which each business is solving a sustainability problem using a combination of absolute and relative ‘positive materiality’ indicators like the percentage of revenues they get from the qualifying product and service – e.g., ideally it needs to be more than 50% of revenues – or the percentage of their profit it contributes, or what global or market share it commands,” she says. The more criteria an issuer fulfils, the stronger their case for inclusion.
decarbonising the world economy but also social needs highlighted by the pandemic including upgrading healthcare and education.
(1) There’s also industry debate over whether the term ‘impact’ should be reserved for philanthropic investors who are happy to make concessions on the expected rate of return.
Selective seven
“We didn't create the seven themes with the credit market specifically in mind,” says Moulds. “Instead we brainstormed what we thought were the most important and critical problems facing the world and then built the themes around those.”
The same kind of subtleties apply around any negative exclusion thresholds in an impact-aligned strategy, says Moulds.
Thoughtful threshold
Some major utility players in renewable energy retain small amounts of legacy coal generation capacity, he says, to make sure they can fulfil their energy commitments to the authorities to ensure the reliability of the power system. Taking an absolute stance – rather than applying a thoughtful threshold – might rule out companies pioneering the world’s energy transition.
The world is in a race against time, and Ngo thinks that adopting this kind of impact-aligned stance could help sustainable debt investors scale up their ambitions. “We're looking to fund mass market activities that have positive impact,” she says.
Sustainable sunrise
“By targeting sunrise rather than sunset industries we are hoping we can generate positive returns as well as promoting low-carbon transition and a more socially responsible society – a real win/win situation.”
We try to quantify the extent to which each business is solving a sustainability problem
That view was tested somewhat during the corona crisis turbulence in March 2020, when the team say “the ESG strategy tended to marginally outperform our conventional high-yield strategy, and the damage done to commodity prices was a factor in that.” Conversely, “the conventional fund tended to outperform the ESG fund during the recovery phase.” (See figure below)
But designing sustainable debt strategies that help fund large-scale change while also meeting investor needs is not easy.
Polina Kurdyavko, Senior Portfolio Manager Anthony Kettle, Senior Portfolio Manager
But that’s a lot easier to claim when investing in, say, the equity of a risky start-up, than when investing in the liquid debt of a more mature company through the secondary debt markets – even though sustainable ventures may need both forms of capital during their life-cycle in order to thrive.(1)
Calling BlueBay’s new strategy ‘impact aligned’ rather than ‘impact’ signals that, “we’re taking care over our terminology while also taking the concept of impact investing just about as far as we can in public bond markets,” says Moulds. Ngo says, “the phrase also signals that while this is about investing in companies offering solutions to major world challenges, the strategy is not about concessionary returns or illiquid markets.”
MACRO
Achieving an inclusive society
“If the issuer does fit within the themes,” says Ngo, “we next ask, are they involved in any other business activities that breach our ethical exclusions? Then there's a third hurdle of whether they run their business in a socially responsible and environmentally sustainable way.” The survivors are then put through BlueBay’s rigorous credit selection process to assess their financial attractions.
She prefers a pragmatic, composite approach over one that insists all firms meet all thresholds. “Consider the instance where a company gets 40% of revenues from a qualifying healthcare product, failing the 50% threshold, but that 40% represents 60% of profits,” she says. Likewise, a fledgling sustainable firm that spends all its R&D on a qualifying product but has little in the way of revenues might fail a revenue test, but still be a legitimate agent of change.
Source: BlueBay Asset Management
My-Linh joined BlueBay in July 2014 and leads on ESG integration across the firm’s global assets. She was previously from Schroders Investment Management Ltd where she was an ESG Analyst in the Responsible Investment department and responsible for ESG analysis and engagement. Prior to this, My-Linh was in the Sustainable & Responsible Investment team at Henderson Global Investors. She holds a Masters in Leadership for Sustainable Development from Middlesex University/Forum for the Future, an MSc in Environmental Management Systems and Auditing as well as a degree in Environmental Sciences, both from the University of East Anglia.
My-Linh Ngo, Head of ESG Investment
CLOSE BIO
+
CLICK FOR BIO
Public debt markets need to help companies that are actively promoting sustainability to scale up
Building knowledge and skills
Ensuring good health, safety, and wellbeing
Enabling a circular economy
Ensuring clean and plentiful water
Promoting clean and safe energy
Promoting sustainable mobility and infrastructure
Tom Moulds, senior portfolio manager
The seven themes:
TAP FOR BIO
ESG is now considered one of our alpha sources
BlueBay Asset Management
snapshot
BlueBay Impact-Aligned Bond Strategy
Source: BlueBay Asset Management For information purposes only
BlueBay impact-aligned bond strategy: determining the portfolio
Source: BlueBay Asset Management The information provided is to illustrate the investment process of the strategy at BlueBay and should not be deemed a recommendation to buy or sell any security or financial instrument
Base currency
USD
Tom Moulds, My-Linh Ngo, Harrison Hill
MANAGERS
May 2021
Launch date
Xxxxxxxxx
Xxxxx xxxxxxxx
50-125
Typical number of issuers
Key Facts
An impact-aligned strategy that will predominantly invest in public and liquid corporate debt
Click on the icons to reveal the flow of interaction
Seven sustainable investing themes
The process of screening a universe of c.4000 issuers to create a portfolio of 50-125 thematic investment ideas is a labour-intensive exercise involving robust debate, detailed analysis and collaboration between portfolio and ESG analysts:
For Professional Investors only. Not for further distribution.
read next
The BlueBay Emerging Market Unconstrained Bond Strategy
For Professional Investors only
NEXT >
< PREV
Solutions promoting sustainable management and conservation of water as well good sanitation
5. Ensuring clean and plentiful water
Solutions improving the quality of the environment by minimising pollution and waste through promoting resource efficiency and stewardship
4. Enabling a circular economy
Solutions enhancing health, safety and wellbeing, as well as facilitating healthy lifestyles
3. Ensuring good health, safety, and wellbeing
Solutions promoting empowerment and lifelong learning through education, training and development opportunities
2. Building knowledge and skills
Solutions promoting sustainable communities by ensuring inclusive and equitable access to basic services
1. Achieving an inclusive society
Solutions enabling the low carbon transition through adoption of alternative energy sources
6. Promoting clean and safe energy
Solutions facilitating the shift to more sustainable transportation modes, buildings and infrastructure
7. Promoting sustainable mobility and infrastructure
Click to explore each theme
4,150 issuers
Total universe of global corporate issuers
3,500
1,000
500
250
50 – 125
Negative ESG (product / norms) screens applied
Remove ineligible issuers (e.g. < B-rated)
Positive screening for possible sustainability themes:
Data mining detailed issuer data
Detailed filter process: Are issuers likely to meet our
sustainability qualification framework?
Deep Dive: Ethical exclusions, Products & services (what),
Conduct (how). Focus on offsetting negative impacts. Remove issuers on which we have existing negative credit views
Credit analyst bottom up ideas based on sector knowledge
Bottom up investment process: Credit fundamentals,
Valuations, & Technicals (supply/demand/liquidity). Select optimal securities for potential investment performance & portfolio construction.
Optimise
Screen
We have identified seven global social and environmental themes that we believe are the most pressing issues facing our world today. Our aim is to invest in bonds issued by companies whose activities address these challenges.
This document may be produced and issued by the following entities: in the European Economic Area (EEA), by BlueBay Funds Management Company S.A. (the ManCo), which is regulated by the Commission de Surveillance du Secteur Financier (CSSF). In Germany and Italy, the ManCo is operating under a branch passport pursuant to the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) and the Alternative Investment Fund Managers Directive (2011/61/EU). In the United Kingdom (UK) by BlueBay Asset Management LLP (BBAM LLP), which is authorised and regulated by the UK Financial Conduct Authority (FCA), registered with the US Securities and Exchange Commission (SEC) and is a member of the National Futures Association (NFA) as authorised by the US Commodity Futures Trading Commission (CFTC). In United States, by BlueBay Asset Management USA LLC which is registered with the SEC and the NFA. In Switzerland, by BlueBay Asset Management AG where the Representative and Paying Agent is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. The place of performance is at the registered office of the Representative. The courts of the registered office of the Swiss representative shall have jurisdiction pertaining to claims in connection with the distribution of shares in Switzerland. The Prospectus, the Key Investor Information Documents (KIIDs), where applicable, the Articles of Incorporation and any other document required, such as the Annual and Semi-Annual Reports, may be obtained free of charge from the Representative in Switzerland. In Japan, by BlueBay Asset Management International Limited which is registered with the Kanto Local Finance Bureau of Ministry of Finance, Japan. In Australia, BlueBay is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of financial services as it is regulated by the FCA under the laws of the UK which differ from Australian laws. In Canada, BBAM LLP is not registered under securities laws and is relying on the international dealer exemption under applicable provincial securities legislation, which permits BBAM LLP to carry out certain specified dealer activities for those Canadian residents that qualify as "a Canadian permitted client", as such term is defined under applicable securities legislation. The BlueBay group entities noted above are collectively referred to as "BlueBay" within this document. The registrations and memberships noted should not be interpreted as an endorsement or approval of BlueBay by the respective licensing or registering authorities. To the best of BlueBay's knowledge and belief this document is true and accurate at the date hereof. BlueBay makes no express or implied warranties or representations with respect to the information contained in this document and hereby expressly disclaim all warranties of accuracy, completeness or fitness for a particular purpose. Opinions and estimates constitute BlueBay judgment and are subject to change without notice. The document is intended only for "Professional Clients" and "Eligible Counterparties" (as defined by the Markets in Financial Instruments Directive ("MiFID") or the FCA); or in Switzerland for "Qualified Investors", as defined in Article 10 of the Swiss Collective Investment Schemes Act and its implementing ordinance, or in the US by "Accredited Investors" (as defined in the Securities Act of 1933) or "Qualified Purchasers" (as defined in the Investment Company Act of 1940) as applicable and should not be relied upon by any other category of customer. In the United States, this document may also be provided by RBC Global Asset Management (U.S.) Inc. ("RBC GAM-US"), an SEC registered investment adviser. RBC Global Asset Management (RBC GAM) is the asset management division of Royal Bank of Canada (RBC) which includes BBAM LLP, RBC GAM-US, RBC Global Asset Management (Asia) Limited and RBC Global Asset Management Inc., which are separate, but affiliated corporate entities. Past performance is not indicative of future results. No part of this document may be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, in whole or in part, for any purpose in any manner without the prior written permission of BlueBay. Copyright 2021 © BlueBay, is a wholly-owned subsidiary of RBC and BBAM LLP may be considered to be related and/or connected to RBC and its other affiliates.® Registered trademark of RBC. RBC GAM is a trademark of RBC. BlueBay Funds Management Company S.A., registered office 4, Boulevard Royal L-2449 Luxembourg, company registered in Luxembourg number B88445. BlueBay Asset Management LLP, registered office 77 Grosvenor Street, London W1K 3JR, partnership registered in England and Wales number OC370085. The term partner refers to a member of the LLP or a BlueBay employee with equivalent standing. Details of members of the BlueBay Group and further important terms which this message is subject to can be obtained at www.bluebay.com. All rights reserved.
Two key sustainability characteristics
Supporting positive sustainability themes
Responsible stewardship through engagement
We identify and invest in companies and assets that are aligned to key sustainability themes
Company engagement plays a critical role in promoting favourable outcomes
Detailed filter process: Are issuers likely to meet
our sustainability qualification framework?
This disclaimer seems to contradict the main disclaimer on the Welcome/Contents page (RE whether the doc is for EU or UK?) – please check/confirm.
Should we replace the word website with the website address.
This para seems to repeat material from the para above.
What is the purpose of the strategy?
We wanted to design a fixed income product that could help provide solutions to sustainability issues while also aiming to deliver attractive returns. Some people think those goals can't go hand-in-hand, but we believe they can.
This is about investing in companies that promote a low carbon transition or a more socially responsible society. We’ve designed a multi-thematic strategy, embracing environmental and social themes, that enables us to invest across the credit spectrum and globally.
What kind of assets are likely to be in the portfolio?
Our selection process focuses on what the corporate issuer does and whether it is doing enough of it. Not on the bond label.
Will green bonds be an important component?
Tom Moulds, Senior Portfolio Manager, on designing BlueBay’s new impact-aligned bond strategy
Polina: For example, in the pre-Covid world, we’d travel to a country together and look at corporates, sovereign, local currency debt holistically, i.e., look at all the opportunities within a country and try to identify for each individual country which assets offered the best risk-adjusted return, almost being agnostic about which sub-asset class those returns comes from – while remaining wary at the portfolio level of the potential stress correlations. Nowadays there’s lots of video calls!
How does that shape your day-to-day investment activities?
Aligning with impact
Tom is a Senior Portfolio Manager within the Investment Grade team focusing on European non-sovereign debt. Tom joined BlueBay in December 2005 as a tactical software developer in the IT team and joined the Investment Grade team as an assistant portfolio manager in July 2007. Tom has been instrumental in driving the success of the European IG credit strategy in which he is a lead portfolio manager, as well as developing the growing buy-and-maintain strategies in recent years. During his time as a developer, Tom wrote and implemented the profit and loss systems used in the hedge fund strategies across all asset classes at BlueBay. His knowledge and design of these systems has been one of the factors in the prolonged and successful track records of the absolute return and hedge fund strategies managed by the team. Prior to BlueBay, he worked as a financial analyst at the UK head office of Schneider Electric and as a financial software consultant at Beicon Group. Tom holds a BSc degree in Mathematics from the University of Wales, Swansea, and is a CFA charterholder.
This is about investing in companies that promote a low carbon transition or a more socially responsible society
Tom Moulds, Senior Portfolio Manager
Anthony is a Senior Portfolio Manager within the Emerging Markets Team. Anthony joined BlueBay in March 2006 and his primary portfolio management responsibilities include the EM long-short credit strategy, the EM Unconstrained Bond Fund and the suite of EM Corporate long only funds. Prior to joining BlueBay, he held a management position at National Australia Bank. Anthony holds a Bachelor of Commerce degree from the University of Melbourne, a Graduate Diploma in Applied Finance and Investment from the Australian Securities and Investments Commission, and is a CFA charterholder.
The team is not siloed, we're all based in London, because the asset class is so interlinked now
Anthony Kettle, Partner, Senior Portfolio Manager
The quick answer is no. We are focusing on investments we think have some ability to perform, to generate alpha.
Will you invest in debt with low risk-adjusted returns if it offers strong sustainable qualities?
Explore BlueBay’s unique approach to integrating ESG with My-Linh Ngo and Lucy Byrne
Justin Jewell and Andrzej Skiba on both their high yield outlook and ESG integration
Is the outlook sustainable?
Anthony: Often we'll have a portfolio manager, a sovereign strategist and a corporate strategist, a financial analyst, all bringing different perspectives. The team is not siloed, we're all based in London, because the asset class is so interlinked now: you can't understand Brazil without understanding that country’s oil production sector, for example.
Emerging market debt: Four main sub-asset classes
• USD-denominated sovereign debt • USD-denominated corporate debt • Local currency-denominated sovereign debt • Local-currency-denominated corporate debt
We see that investors in emerging markets usually combine different asset classes without enough reference to their very different volatility regimes.
So the assets will be predominantly publicly-traded, liquid corporate bonds, spanning investment grade, high yield and emerging markets. But we will also look at some sovereign-backed project-labelled green, social or sustainability bonds, where we believe that the use of proceeds is contributing to one of our sustainability themes.
Client feedback suggested the majority would like a main focus on investment grade issuers, so the strategy looks to invest a minimum of two-thirds in investment grade issuers, with up to one-third in high yield. The geographical dispersion again plays to investors’ concerns about risk. We’ve said 80% or so of the portfolio will be in developed markets with a smaller portion for emerging markets.
What is the balance in terms of credit quality and geography?
We ask: Is the issuer helping to solve the sustainability problem that we want it to solve? That said, if an issuer that meets our sustainability criteria happens to have a green bond, we may well select it.
One reason is that many issuers issue their green, social and sustainability-linked bonds out of exactly the same entity from which they issue their normal bonds. There's no ring-fencing around that money or around how they use the proceeds.
Why don’t you use the green label as a short cut?
But that doesn't mean we won't invest in debt that offers, on the face of it, low returns because there will be a whole spectrum of quality of issuers in this portfolio. For example, a vaccine bond guaranteed by the UK government might not look cheap but may still be of very high credit quality and offer a huge amount of social capital.
There will be some scenarios where we think a green bond framework is robust enough. But one of the key developments I would like to see is issuers creating a separate entity to really ring-fence those assets.
I think one of the dangers in sustainable investing is blindly buying sustainable assets after they have already got very expensive. So the key challenge we face is not compromising too much in terms of valuations.
What was the key challenge you faced in developing the strategy?
We go through a particularly meticulous process for this impact-aligned strategy. The first part, when we started building the strategy, was to screen the whole universe of potential investments.
How does your investment process help select sustainable opportunities?
We screened out issuers we knew we could not buy due to our criteria. Then we used programming languages to write routines to interrogate data, mainly from Bloomberg, to create a potential universe of issuers that fit our sustainability themes. Our data science approach is something that, we see, relatively few other sustainable investors do, as yet.
Then there’s an iterative process of narrowing down that universe through a combination of looking at things more carefully and bringing in the analysts. We've educated our analysts on our sustainability criteria to make sure they really understand what we're looking for.
I guess the first stage of building a potential universe is almost like a quantitative process. We screened 4,000 global corporate issuers down to around 200-250, for example, through various sorts of iterative processes. But, yes, then we're working with the ESG team and the bottom-up credit analysts – there are around 30 at BlueBay – to interrogate those issuers to see if they really do meet our qualifying criteria for the impact fund.
It’s a mix of data science and human judgment?
For qualifying issuers, we then ask: Does this work from a credit perspective? Here we apply our well-established and rigorous BlueBay investment process to make sure that we're selecting issuers with the ability to generate attractive returns.
How do you factor in the financial analysis?
Of course, we also go direct to individual analysts and encourage them to offer names that could work for this strategy from their coverage universe. They come to us with ideas, and we “kick the tyres” on each idea including the impact criteria.
Everybody has got a stake in this strategy, from portfolio management, to analysts, to the ESG team! It may be the first strategy at BlueBay to have such an intense degree of collaboration. Personally, I’ve found it fascinating to deal with so many analysts from different teams and collect so much information from different areas.
Is teamwork critical to this kind of multi-theme global strategy?
Our data science approach is something that we see relatively few other sustainable investors do, as yet
In the long run ESG will drive asset performance, particularly among institutions that have to stand up and be accountable to their members
