Mike Fox and Rachid Semaoune on sustainable global credit 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
Sustainable investing is growing and evolving fast in terms of philosophical approaches, standards and specific investment strategies. That’s true across the sustainable investing universe, but it’s especially true for sustainable credit investing.
IN THIS EDITION
For professional clients only, not suitable for retail clients. This is a financial promotion and is not investment advice. The views expressed are those of the authors at the date of publication unless otherwise indicated, which are subject to change, and are not investment advice.
Important information
READ NEXT
In this guide, Mike Fox, Royal London Asset Management’s Head of Sustainable Investments, and Rachid Semaoune, Senior Fund Manager, help us explore some of the key issues while introducing the latest addition to RLAM’s long-established sustainable fund range. Their work developing the Royal London Global Sustainable Credit Fund, launched in February 2021, has helped them understand both the challenges and the opportunities that come from taking a global approach to sustainable credit.
For Professional Clients only
© 2019 Incisive Business Media (IP) Limited
Campe Goodman on how impact bond investors can shift the world into a better trajectory
Sustainable investing is growing fast and one of its newest tools – impact bonds – further increases the opportunities available to investors. By using impact bonds, debt investors can pursue returns while putting their money to work on solving the world’s biggest social and environmental challenges.
In this Focus, Campe Goodman, portfolio manager at Wellington Management, discusses the key issues surrounding impact bonds including how capital can be steered towards the most beneficial projects. He also introduces the Wellington Global Impact Bond Fund, which has the goal of addressing some of the world’s most pressing challenges while seeking to provide strong financial returns.
Mike Fox, Head of Sustainable Investments
RLAM’s Independent Advisory Committee
Royal London Global Sustainable Equity Fund
SNAPSHOT
George Crowdy, Fund Manager
THE INTERVIEW
The Royal London Global Sustainable Credit Fund is a sub-fund of Royal London Asset Management Bond Funds plc, an open-ended investment company with variable capital and segregated liability between sub-funds. Incorporated with limited liability under the laws of Ireland and authorised by the Central Bank of Ireland as a UCITS Fund. It is a recognised scheme under section 264 of the Financial Services and Markets Act 2000. The Investment Manager is Royal London Asset Management Limited. Most of the protections provided by the UK regulatory system, and the compensation under the Financial Services Compensation Scheme, will not be available. Royal London Sustainable Managed Income Trust, Royal London Sustainable Managed Growth Trust, Royal London Sustainable Diversified Trust, Royal London Sustainable Word Trust and Royal London Sustainable Leaders Trust are held within RLUM Limited Unit Trusts, which is an authorised unit trust scheme. The Manager is RLUM Limited, authorised and regulated by the Financial Conduct Authority, with firm reference number 144032. The Royal London Global Sustainable Equity Fund is a sub-fund of Royal London Equity Funds ICVC, an open ended investment company with variable capital with segregated liability between sub-funds, incorporated in England and Wales under registered number IC000807. The Authorised Corporate Director (ACD) is Royal London Unit Trust Managers Limited, authorised and regulated by the Financial Conduct Authority, with firm reference number 144037. For more information on the funds or trusts or the risks of investing, please refer to the Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Information page on www.rlam.co.uk. Issued in May 2021 by Royal London Asset Management Limited, 55 Gracechurch Street, London, EC3V 0RL. Authorised and regulated by the Financial Conduct Authority, firm reference number 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.
Past performance is not a guide to future performance.
INVESTMENT RISKS
The value of investments and the income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested.
Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Credit Risk: Should the issuer of a fixed income security become unable to make income or capital payments, or their rating is downgraded, the value of that investment will fall. Fixed income securities that have a lower credit rating can pay a higher level of income and have an increased risk of default.
Derivative Risk: Derivatives are highly sensitive to changes in the value of the underlying asset which can increase both Fund losses and gains. The impact to the Fund can be greater where they are used in an extensive or complex manner, where the Fund could lose significantly more than the amount invested in derivatives.
Efficient Portfolio Management (EPM) Techniques: The Fund may engage in EPM techniques including holdings of derivative instruments. Whilst intended to reduce risk, the use of these instruments may expose the Fund to increased price volatility.
Emerging Markets Risk: Investing in Emerging Markets may provide the potential for greater rewards but carries greater risk due to the possibility of high volatility, low liquidity, currency fluctuations, the adverse effect of social, political and economic instability, weak supervisory structures and accounting standards.
Exchange Rate Risk: Changes in currency exchange rates may affect the value of this investment.
Interest Rate Risk: Fixed interest securities are particularly affected by trends in interest rates and inflation. If interest rates go up, the value of capital may fall, and vice versa. Inflation will also decrease the real value of capital.
Leveraged Risk: The Fund employs leverage with the aim of increasing the Fund’s returns or yield, however it also increases costs and its risk to capital. In adverse market conditions the Fund’s losses can be magnified significantly.
Liquidity Risk: In difficult market conditions the value of certain fund investments may be difficult to value and harder to sell, or sell at a fair price, resulting in unpredictable falls in the value of your holding.
credit catch-up
Name xxxxxx xxxx xxxxx xxxxxxx
HOME
FUND SNAPSHOT
FUND Q&A
That fast-paced maturation will be packed with challenges. “There’s huge opportunities within sustainable credit but you are entering a much more virgin territory, with a lot of formation of ideologies and approaches – you have to be able to work with that,” he says.
“One key difference between global sustainable credit versus equity,” says Semaoune, who manages the new fund, “is that there are large market areas you can only access within global credit, such as social housing, because there is no publicly-listed equity.” He says that a big advantage of RLAM’s proprietary ESG research is that it helps uncover opportunities in credit areas not covered by third-party equity-oriented ESG ratings.
Credit challenges
market practices might only take another two or three years to catch up.”
ustainable credit investing is growing up as a way for investors to help meet the world’s challenges. “It may eventually be bigger than sustainable equities,” says Mike Fox, one of sustainable investing’s most experienced practitioners, “and
S
The great
Every single credit, every single equity, discloses on ESG differently so you have to analyse them entity by entity
Mike Fox, Head of Sustainable Investments, Royal London Asset Management
Mike Fox and Rachid Semaoune on their new global approach to sustainable credit investing
For professional clients only, not suitable for retail investors. The views expressed are the contributors' own and do not constitute investment advice.
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:
Planetary priorities
he world faces diverse challenges from climate change and rising sea levels to the lack of affordable housing in
T
Can bond investors help change the world?
Measurable Impact
MENU
CLOSE
Campe Goodman, portfolio manager
Wellington Global Impact Bond Fund
I think a more digital and connected world is here to stay, as is the need for resilient healthcare systems
Companies addressing the world’s greatest challenges should be interesting places to invest
There’s huge opportunities within sustainable credit but you are entering a much more virgin territory
Last February, Fox teamed up with Rachid Semaoune, an experienced credit fund manager, to add an ambitious new global sustainable credit fund to Royal London’s well-established sustainable range, building on the range’s existing sterling sustainable credit elements. The pair have strong views on the differences between sustainable credit and equity – and why proprietary research and a global perspective could offer big advantages on the credit side.
Social housing, which provides affordable decent housing for the wider population that cannot afford to buy a property, also demonstrates how a company’s sustainable and credit characteristics can interact.
“If a housing provider offers a sustainable approach that includes strong protections for tenants, clients are more likely to rent the same property on a long-term basis: in Germany, some families rent the same property throughout their entire life,” says Semaoune. Predictable cash flows and high-quality residential assets tend to reduce financial risk. “In fixed income, we love ‘stable and boring’ because our upside is capped and our downside is unlimited,” he says.
The UK has a significant social housing sector but Semaoune says that, in some investment sectors, the only way to access a wide opportunity set is to look across national boundaries.
Diversity dividend
“Take next-generation medicine, a relevant theme in the light of the pandemic, where there are only three healthcare companies with sterling-denominated bonds outstanding. The industry space is dominated by large US pharmaceutical companies – so going global means you suddenly move from three issuers to well over 80.” That means, he says, “we have the chance to build a much more strongly diversified portfolio by holdings, sector, geography, and currency than if we were just investing in one region of the world.”
Building a global portfolio is still hard work. “One of the challenges was trying to find the right renewable energy companies in North America,” says Semaoune. “Europe is well ahead of the US in transitioning to a decarbonised economy. You can find attractive renewable energy companies and utilities in the US, but it took deep analysis and help from our ESG team.”
Carbon conundrums
Fox explains that “standards in the sustainable credit market are probably where equities were a few years ago so you have to work harder to find the most sustainable bonds globally. We have a four-person external advisory committee who challenge us to keep our sustainable bar high across the range, including global credit.”
Some investors try to short-circuit the fundamental research by relying on third-party ESG ratings or bonds labelled as environmentally green or socially positive. But Fox and Semaoune have doubts.
Losing labels
“There’s lots of jargon within sustainable investing and especially on the global credit side,” says Semaoune. “It seems there’s hardly a day now where you don’t have some labelled bond issued in the market. But what those labels mean can be quite confusing.” In particular, companies can issue a green bond to fund a green project while their global business may have an overall negative environmental impact, he says.
Across the ESG world, there is still little consistency of disclosure, says Fox. “Every single credit, every single equity, discloses on ESG differently so you have to analyse them entity by entity. We also think you largely have to do that through your own lens because everybody’s definition of sustainability is a bit different,” he says. RLAM established its sustainability range before third-party ratings gained ground, so the team is used to doing its own legwork.
Global bond issuance often comes very fast, says Fox, so the knowledge bank RLAM has already amassed on companies’ sustainability helps the team pounce on opportunities. But credit decisions demand special care regarding governance and credit structures.
Securing sustainability
“Bonds are a lot more complex than equities,” says Semaoune. “You can lend money to a company either on a secured or unsecured basis; to different parts of the capital structure; or to a ring-fenced entity or bankruptcy-remote SPV. That has to be taken into account in your ESG analysis as well as your credit selection.”
He says RLAM’s long track record of closely analysing bond documentation and covenants packages helps the team. “For example, some US utility companies issue bonds secured on their assets, so we take that into account when we do our ESG analysis. Likewise, UK social housing bonds may be secured on the properties themselves.”
The team say that a combination of deep credit and ESG expertise could prove powerful. “Across global credit, we think that you can find companies that have a positive impact on the environment and society and identify pockets of value without compromising on credit quality,” says Semaoune.
Credit crowd
“Sustainable credit will become an increasingly crowded market but we think there will continue to be a place for fundamental due diligence,” says Fox, “including going back to source information by a group of people who have executed sustainable investing for perhaps 17 or 18 years: it might sound intangible but it’s the most critical part of what we do.”
eventually be bigger than sustainable equities,” says Mike Fox, one of sustainable investing’s most experienced practitioners, “and market practices might only take another two or three years to catch up.”
Royal London Global Sustainable Credit Fund
Rachid Semaoune, Senior Fund Manager
Mike Fox, Head of Sustainable Investments and Rachid Semaoune, Senior Fund Manageranager
Royal London
Global Sustainable Credit Fund
Source: RLAM
SECTOR
Bloomberg Barclays Global Aggregate Corporate Total Return Index Hedged USD
BENCHMARK
IA Global Corporate Bond
10 February 2021
LAUNCH DATE
Rachid Semaoune
MANAGER
USD
Base currency
Introducing the Global Sustainable Credit Fund
Current sustainable themes
Sustainable process
The fund management team have a collegiate approach and are able to draw on RLAM’s resources and experience across a number of different areas. This provides internal sustainable investment expertise, which is supported by an independent External Advisory Committee.
Our new fund brings together long, successful track records of fixed income and sustainable investing, harnessing our unique credit philosophy and a rich heritage in sustainable investing. Key features: • Global diversified credit portfolio • Highly diversified by geography, currency, sector and issuer • Collaboration across our experienced investment teams • Independent External Advisory Committee • Established and proven sustainable process, evolving over 15 years
£50m
£85m
£500m
£1bn
£4bn
£9.2bn
Industry 4.0
The fund is the latest in the long evolution of the RLAM sustainable fund range
Source: RLAM as at 28 February 2021. AUM includes the sustainable fund range and segregated mandates.
The new fund complements and extends RLAM’s existing sustainable fund range
Equities
Managed Income
IA Sterling Corporate Bond Sector
Source: RLAM. For illustrative purposes – reflects approximate percentage asset allocation, weightings may vary.
Source: RLAM for illustrative purposes only.
Should sustainability
go global?
Agriculture & naturalness
AI & cloud computing
Next generation medicine
Essential infrastructure
Property
Financial resilience
Community funding
Energy transition
Assets under management
Managed Growth
IA Mixed Investment 0%-35% Shares Sector
World
IA Mixed Investment 40%-85% Shares Sector
Diversified
IA Mixed 20%-60% Shares Sector
Global
IA Global Sector
Leaders
IA UK All Companies Sector
The new Global Sustainable Equity Fund
The new Global Sustainable Credit Fund
Global Sustainable Credit
Multi Asset
IA Mixed Investment 20%-60% Shares Sector
Fixed Income
Global Equity
Past performance is not a reliable indicator of future results.
Click here to find out more about the Royal London Global Sustainable Credit Fund
Click here to find out more about our range of sustainable funds
External Advisory Committee
Where votes are not aligned, issuers are referred to an external advisory committee of industry experts
Responsible Investment Team
Democratic voting approach for each outcome
Sustainable analysis
Bespoke approach applied in each instance with stock specific material factors reviewed
Is the overall impact of the products and services contributing towards a net benefit within society?
Products & services
Board independence, remuneration, diversity, audit and accounting, historic fraudulent activity
Governance
Human rights, social inclusion, staff benefits and training, supply chain management etc.
Social
Climate change strategy, waste management, water management, pollution etc.
Environmental
Mike Fox, Head of Sustainable Investments and Rachid Semaoune, Senior Fund Manager
fund q&A
Name xxxxxx xx xxxxxxx
What is the key aim of the Global Sustainable Credit Fund?
Our aim is to invest in companies that have a positive impact on the environment and society without compromising on returns and credit quality. The investments have to meet our definition of sustainability and our criteria for financial soundness. It’s not one or the other.
We hope to capitalise on our credit expertise and a sustainable process we have been developing for many years
We aim to invest in companies that have a positive impact on the environment and society
For professional clients only, not suitable for retail investors. The views expressed are the contributor’s own and do not constitute investment advice.
George Crowdy tells how the corona storm is reshaping sustainability and why his new fund embraces emerging markets
He thinks the S in ESG – the social side – is taking on a new prominence. “Sustainable brands are made through crises like this,” says Crowdy, who co-manages the new fund with Mike Fox, RLAM’s Head of Sustainable Investments. “People will want to purchase from, and work for, companies who show they really care about their employees and broader society at critical times.”
Social sustenance
We wanted to widen our sustainable range’s offering to include global sustainable credit, so that the range could hope to meet a broader set of client requirements – a lot of people want global sustainable credit as well as the sterling sustainable credit elements that are already available in our sustainable range.
What motivated you to create the fund?
By doing so, we hoped also to capitalise on our expertise in credit analysis and to leverage a sustainable process that we have been developing in-house for many years, including the specific sustainable credit expertise we’ve gained over the years while developing the existing sustainable credit elements of the range.
The fund is global with a strong focus on US, Europe, the UK, and Australia. In theory we can also invest in emerging markets provided those countries support human and workers’ rights but this is likely to be a very small part of the portfolio. The fund is primarily invested in investment grade securities.
What is the fund’s focus in terms of geography and credit quality?
The fund is highly diversified by geography but also in terms of sector and holdings. We typically have more than 200 holdings within the portfolio to try to diversify away the impact of any single default.
Does the global focus help in terms of diversification?
The weight that we attribute to a certain issuer in a portfolio will typically depend on the credit rating, the sector and maturity of the bond or the security, and the covenant package embedded in the bond.
The fund will typically have a higher allocation to secured bonds than its benchmark, as well as a lower carbon intensity.
In a year with very strong commodity prices, fossil fuel and mining sectors are likely to outperform versus other sectors. But on a longer-term basis, we’ve seen that the cost of funding in these sectors has gone up and we expect they might continue to underperform versus more sustainable sectors.
Could a carbon-lite approach lead to underperformance in some years?
Over the long term, credit selection is likely to be the main driver of the fund’s performance. The fund benefits from the experience of our sterling credit team, and from our global credit team.
Our process has a focus on products and services, and ESG standards within a company. This naturally takes us towards sustainable investments. We also have the ability to analyse individual credit issuers internally which we think helps us identify sustainable opportunities in a timely and effective way.
How does your investment process help you select sustainable investments?
We screen out issuers from sectors that have negative environmental and social impact such as fossil fuel extraction, mining companies, tobacco companies, beverages companies that promote irresponsible drinking, and gambling companies.
Once we’ve narrowed the universe to that point, we apply our proprietary sustainable process. That consists of a stock by stock, issuer by issuer analysis, looking at the ESG factors and screening for the companies that have the best ESG factors.
That in-depth analysis is important because it means our sustainable fund does not rely on third-party analysis or on labels – ‘green bond’, ‘social bond’ and so on. A green label is not a substitute for the full ESG analysis executed by our team.
It’s exactly the same scorecard on the sustainability side but applied in a slightly different way. On the equity side, we tend to grade our position sizes around how high the sustainability score is, ranging from say 0.5% to 5% and above. Because of the greater diversification and therefore number of holdings that we want in global credit, that would end up as an exercise in splitting hairs. So the scorecard tends to have a simpler pass/fail effect in credit selection.
Do you assess sustainability differently in global credit versus equity?
After the ESG analysis is executed by our responsible investment team, we take a democratic approach, including a vote to decide whether or not a company can make it into our portfolio from a sustainability perspective.
Are there other distinctive features of your sustainable selection process?
If we disagree, we can ask for additional advice from a four-person external advisory committee. They come back with their views and then we have a second vote. The advisory committee also provides input at a thematic level.
Mike joined Royal London Asset Management in August 2013 following the acquisition of The Co-operative Asset Management by the Royal London Group. He is Head of Sustainable Investments at RLAM. Mike became a fund manager in November 2003 when he took over managing the RL Sustainable Leaders Trust. Mike originally trained and qualified as a chartered accountant with Ernst & Young in Manchester.
Head of Sustainable Investments
Mike Fox
Senior Fund Manager
Rachid joined RLAM in February 2015 as a Credit Fund Manager within the Fixed Income Team. Rachid joined from UBS Asset Management where he spent three years managing investment grade credit portfolios. Prior to this he was a deputy credit fund manager at Old Mutual Asset Management. Rachid began his investment career in 2001 at Gulf International Bank where he worked as a credit analyst and deputy fund manager. Rachid studied for a PhD in Physics at Imperial College London and holds a Postgraduate Degree in Laser Physics from the Université Paris 13.
MEET THE team
