Pan Trustees' Andrew Cheeseman, Towers Watson's Ed Britton, M&G's Richard Ryan, Aviva Investors' Dan James, GSAM's Jeremy Cave and PiRho's Nicola Ralston discuss how larger and smaller schemes could construct a multi-asset credit portfolio.
Ed Britton: You would start from the position of wanting to give a skilled manager scope to do everything, and then you would say that as good as these managers are, they cannot be skilled in everything, so you start to narrow it down. That is one approach we have had and a lot of our clients have gone into funds where the manager is allowed to lend through bonds or lend through loans or they could lend through a structured vehicle, so you get three immediately fairly esoteric individual asset classes and put them together and the manager can actually do a much better job.
The question then is do you choose one manager to do that or do you choose two or three managers to do that, because these are esoteric areas where you need real experts. We are now providing a wrapper for clients that want to have several different managers’ products – they can get exposure to a series of experts through one vehicle.
Nicola Ralston: I certainly agree with Ed’s starting point that you ideally want to be less rather than more constrained because otherwise you determine the outcome by your starting constraints. But I would actually take a, perhaps, controversial view which is for the smaller clients – and I am talking here the sub-£100m, the smaller pension funds – which is I am not sure that they need some of these esoteric credit strategies at all.
There is only so much time that trustees have got to understand investment strategies for their pension schemes and I am uncomfortable about the idea of clients investing in product types and security types that they do not really understand at all. And even with a properly researched wrapper, it is an interesting question as to whether the medium and smaller funds need that level of diversification and complexity.
Dan James: So would your approach to the smaller clients be more of a solution-orientated approach as opposed a specific product approach?
Ralston: It depends what you mean by solution-orientated approach, but probably, yes, the overall multi-asset rather than specialist credit multi-asset.
James: Yes, so what is it the investor wants to achieve – do they want to beat the bank, do they need a real return, do they need to match liabilities?
Ralston: Yes.
James: So for those smaller schemes one would assume that perhaps an all-encompassing type approach would be more appropriate because, as you say, they do not have to have the specific knowledge of individual asset classes and also probably do not have the desire to make the decision as to when you switch between asset classes.
Ralston: Obviously there are always exceptions, but in general I would agree with you.
James: I would argue as an investment manager if you give us more things to look at, we should do a better job.
Ralston: Yes, I would agree with that.
James: If you ask me, ‘Is investment grade credit going to go up or down today?’ I could give an answer, but if you asked me in the context of the broader spectrum I could probably give you a much more coherent answer and something that an investor would certainly appreciate as opposed to, ‘It could go up but it might go down.’
Richard Ryan: Actually, the growth in the multi-asset credit funds that we have seen has come predominantly from what I think would be smaller pension schemes and those that do not necessarily have the governance or the structure whereby they can sit around and say ‘Do you know what, that segment of the market place looks more attractive today.’ We do them a disservice by saying, ‘You’re too small to benefit from a changing market place.’ And the effort of the multi-asset credit endeavour should be about creating a better risk profile than is simply available in something like investment grade.
So from the pure investment perspective there have been times over the past five years, 10 years, where you can meaningfully change the risk profile of your standard investment grade portfolio by using areas that were not within that very narrow confine, that very narrow silo. And investors – whether they are large pension schemes or small pension schemes – can benefit from that. So there is definitely a bridge that needs to get crossed which is about educating those clients and hand-holding.
Ralston: I do agree that artificial boundaries are unhelpful. I am saying that for the smaller clients, why stop at credit, because those same issues apply in different parts of the capital structure and arguably through to equities as well.
Jeremy Cave: Picking up on a couple of things, one is this understanding of risk. When people talk about the absolute risk of their investment grade portfolio and they say they are worried about credit risk – they should be much more worried about interest rate risk because that is going to dominate the absolute returns on their investment grade credit portfolio. This issue is particularly pertinent in this era of low yields.
So I think being clear with clients about the composition of risk in their portfolios is vital. Clients may want to consider more unconstrained portfolios to get a clearer view of the risk they’re taking. For example, clients can better target different types of credit risk by moving into multi-asset credit portfolios, in which credit risk predominates as opposed to interest rate risk.
