Nine months after launching the RL Global Sustainable Credit Fund, Senior Fund Manager Rachid Semaoune discusses the opportunities of extending RLAM’s parallel expertise in sustainable and credit investing into global credit.
As society has increasingly accepted the risks posed by environmental, social and governance (ESG) factors, there has been an exponential increase in interest in sustainable investing. In equities, as investors have increasingly embraced ESG analysis, there has been a coalescence of standards and terminology, and better data help for sustainable fund managers. Credit investing is some way behind and, while catching up quickly, is more virgin territory.
How is the fund different?
Inevitably, the increased interest in ESG-related investing has led to myriad fund launches. What makes the RL Global Sustainable Credit Fund different from other new funds? First, RLAM has a long-established presence in sustainable investing in general (our UK equity-focused Sustainable Leaders Fund celebrated its 30th anniversary in 2020); and sustainable credit in particular, with over 12 years of experience in sustainable sterling credit. We currently manage over £12bn in our sustainable funds.
We believe that this experience gives us a clear edge over asset managers who are new to this area. We have a clear and consistent sustainable investment philosophy and process; and have built a team of specialists to analyse sustainable investment opportunities. This proprietary expertise is guided by an independent external advisory committee that plays a significant role in assessing our processes, reducing the risk of fund managers ‘marking their own homework’. These various elements can’t be easily replicated by less-experienced asset managers.
Genuine active investing
Underpinning these factors is our belief in genuine active investing. Bonds are a lot more complex than equities, and investment decisions demand special care regarding governance and credit structures. 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. Our experience of closely analysing bond documentation and covenants packages is a real advantage.
It is surprising how readily some managers are prepared to use group-level equity-oriented ESG data to inform credit investment decisions. Even more so when many issuers have no listed equity and therefore no such ESG data profile. This highlights an important aspect of credit markets for sustainable investors: they provide opportunities to gain exposure to different investment themes from equities, such as social housing. Our proprietary ESG research capability helps to uncover opportunities in credit areas not covered by third-party equity-based ESG ratings.
The need for expertise
This fund represents a genuine fusion of RLAM’s expertise in sustainable investing and credit investing. For example, given the asymmetry of risk in credit, we have a strong philosophical commitment to secured lending to protect clients’ interests. With the relative inefficiency of credit markets, this can often be achieved with no adverse impact on yield. There are plenty of bonds that offer security at a higher yield than comparable unsecured bonds. Often, however, they are not included in mainstream credit indices and require some effort and research expertise to uncover – this is what I mean by “genuine active investing”.
A similar argument applies to ‘labelled’ (such as green or sustainable) bonds. While a good thing in theory, they have shortcomings – not least that blind demand can lower the yield. Following the herd into labelled bonds could very easily reduce returns. Many issuers do not ‘provide a net benefit to society' (our definition of sustainability), such as fossil fuel companies. Also, they are often issued with somewhat vague commitments and limited penalties for missing any targets.
The need to diversify
We also believe that diversification is crucial in managing risk. This is ultimately why we launched the fund – building on our historically strong credit and sustainable franchises, it offers a global solution to clients seeking diversification away from sterling credit. While this greatly enhances the opportunity set, it increases the importance of having a strong investment process – and the self-discipline and checks and balances to follow it.
Nine months or so after the fund’s launch, it’s going pretty much as expected – I have, after all, been managing a segregated client fund with a global and ESG-driven mandate for four years. While financial markets have been challenging at times as Covid related effects have played out, this disruption provided opportunities to build out the fund on attractive terms – it took a little longer than expected, but this patience paid off. There are clear risks emerging to the post-Covid recovery, not least supply chain-driven inflation, but the fund is well-placed to deliver on its mandate.
This article first appeared in Citywire Wealth Manager ESG Forecast, published on 1 November 2021.
Past performance is not a guide to future performance. 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.
The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and are not investment advice.
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 (ICVC), with segregated liability between subfunds. 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. For more information on the trust 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. Most of the protections provided by the UK regulatory system, and the compensation under the Financial Services Compensation Scheme, will not be available.