Fixed Income – US Short Duration High Yield
UK Insurer | 2021
Engagement at a glance
|Client Country/Type:||UK Insurer|
|Asset Class:||Fixed Income, US High Yield (Short Duration)|
|Mandate Size:||USD140 million|
|Mandate Geography:||United States|
|Mandate Type:||Separately Managed Account|
|Service Provided:||Manager Selection||Investment Objective:||Maximising returns on a capital-adjusted basis while minimising drawdowns|
This UK-based international property and casualty insurance group was seeking to invest USD140 million with one manager running a US-centric short duration, high yield bond portfolio. The insurer wanted to target BB-rated bonds maturing within five years to achieve a desired level of yield and keep capital charges to a minimum. Having made considerable progress recently on implementing ESG considerations across its portfolio, the client also wanted to find a responsible, experienced investment partner capable of implementing a long-term carbon reduction plan and working collaboratively on bespoke solutions for the insurer.
- Identifying an appropriate range of prospects: the challenge of this bespoke mandate was clear from the start: this type of strategy does not exist on a standalone basis, so bfinance sought to elicit interest from a wide range of prospects. Ultimately, 35 managers—whose strategies spanned full-maturity and/or rating constrained high yield bonds—decided to compete for the mandate.
- Assessing the capabilities of appropriate managers: the client decided to retain ten strategies for further due diligence and—although none were exactly in line with the mandate given the client’s focus on BB-rated bonds maturing within five years—the managers’ willingness to meet that request without denaturing their investment philosophy was of paramount importance. The bfinance team carefully assessed their pedigrees, capabilities and credentials given the asymmetric risk-return profile of the asset class.
- Reviewing candidates’ ESG credentials: all the managers retained for the final round demonstrated strong ESG capabilities, including the ability to adhere to the client’s exclusion list and offer a clearly defined carbon footprint reduction plan. As part of that analysis, bfinance also looked at the manager’s ability to measure and report on greenhouse gas emissions and indirect emissions as well as future plans to become carbon neutral by 2050.
Our specialist says
This client was looking to implement a strategy focused on a very specific category of short-duration BB-rated bonds, which simply doesn’t exist off the shelf. We cast a wide net and considered managers with a wealth of experience across different types of high-yield strategies, but the real challenge was to determine whether a manager’s standard strategy, which excelled on its own merits, would be adversely impacted by the need to adapt it to the client’s specifications. Would that adaptation undermine the viability of the strategy itself? The leading manager we identified was able to pass that test and provide the client with evidence of its firm commitment to ESG principles.