Hammersmith and Fulham fund moves to buy-and-maintain strategy

Draft minutes from a March 26 meeting show that a subcommittee of the circa £986.6m fund agreed to appoint Pimco as its new manager, due to its ability to offer more diversification in global markets.

Buy-and-maintain is a nice way to get a very simple exposure to corporate bond markets

Ben Gold, XPS Pensions

The decision to move towards a buy-and-maintain strategy came after the subcommittee chose to withdraw its funds from Insight Investment’s Bonds Plus Fund in February.

Less reliance on manager skill

“The subcommittee indicated its wishes to move to a strategy that did not rely on investment managers making market calls, but select one that provided a stable market-based return,” according to meeting documents.

It notes that a buy-and-maintain fixed income strategy is not concerned with short-term interest rate movements or short-term capital losses. Instead, it delivers market return as long as the underlying companies do not default.

The subcommittee agreed to invest £85m redeemed from the Insight mandate into the Pimco fund. Insight declined to comment. 

Buy-and-maintain credit mandates generally invest in high-quality, investment-grade corporate bonds, which they aim to hold to maturity.

Ben Gold, head of investment for Leeds at XPS Pensions, says that more and more pension schemes are looking at this strategy.

One reason is that “cash flow is more predictable, and you can have more control over it, so that can be quite an attractive feature for pension schemes at the moment”.

Mr Gold adds: “Buy-and-maintain is a nice way to get a very simple exposure to corporate bond markets. You get the active manager who does the initial due diligence, picks the corporate bonds, will keep an eye on them on an ongoing basis, but isn’t actively looking to trade them all the time, and so you’re not so exposed to whether they get those decisions right or wrong.”

Attractive option for schemes looking to de-risk

A number of pension funds have turned to buy-and-maintain strategies to help them meet their cash flow requirements.

Both the RSA Insurance Group’s Sal Pension Fund and the Reuters Pension Fund, for example, have turned their attention to buy-and-maintain strategies in recent years.

These mandates allow schemes to spend their active management budget more wisely, according to Mr Gold. He notes that for many pension funds that are on a path to de-risking or need lower returns, that approach can be really attractive.

With buy-and-maintain credit “it is a bit active in that your risk in corporate bonds is the risk that the borrower defaults, and so you need to do something to try and manage that risk – and buy-and-maintain is sort of the gentlest way to do that”, he says.

The manager picks the bonds with a view to avoiding defaults. “If you get that right they’re just going to hold the bonds until they mature, and you’ve got certainty that you’re going to get your money back with whatever level of return that’s built in to the interest payments,” Mr Gold adds.