Azhar Hussain heads up RLAM’s global credit team, a responsibility that includes the management of RLP Global High Yield and RLP Short Duration Global High Yield funds which are used within the Governed Range.
These funds invest in less well-known parts of the fixed income universe – high yield bonds and loans. Azhar created the team on joining RLAM in 2012. But the team has collective experience far beyond this.
“The emphasis has been to create a team of diverse experience and expertise, as I think this brings a greater variety of views and a better challenge,” he says. “But we do share an underlying view that you have to research and understand every bond or loan that you are going to add to a portfolio. And to do that properly, there are no shortcuts. That’s something that we’ve all done throughout our careers”.
A lot of high yield bonds and loans originate from companies that are not listed on equity markets. So the ‘off-the-shelf’ research that is available for many listed companies just isn’t available.
As a bond investor, my upside is almost always less than the downside
“We’ve always placed an emphasis on governance. When you’re looking at a company that isn’t quoted, you want a degree of trust in the numbers you are looking at. The quality and integrity of management and owners cannot be understated here.”
The high yield market is less homogenous than the investment grade universe. This means that research has to be bespoke. This applies to ESG analysis as much as traditional financial analysis. And while Azhar and his team are comfortable doing some aspects of ESG research, there are changes in this area that make having a specialised team essential.
For example, RLAM’s Responsible Investment team have carried out a review of all the bond holdings in the energy and chemical sectors.
The high yield market is less homogenous than the investment grade universe.
“The difference between the best and the worst ESG performers can be very marked – so for instance, when looking at oil exploration companies, we see some that are trying to reduce the impact of their operations by running their rigs on renewables where possible and are transparent about boardroom pay and the like. Others are trying to drill in more controversial areas such as the Arctic and are less willing to discuss governance with investors.
The oil sector research was a good demonstration of how ESG factors are a key element in our investment process. It highlighted that there is a real difference in terms of what companies are doing to address ESG factors and hence the risk that bond holders are taking. As investors, we want to make sure we are properly rewarded for this risk in each investment.”
Tailored research is also useful as it can show where ESG progress is real or cosmetic. Instances of ‘green washing’ – where PR and marketing can suggest that a company’s ESG credentials are stronger than is the case – are not widespread, but are nonetheless something to look out for. Some companies are now issuing green bonds – which state that the proceeds raised will be used for green activities, such as the generation of renewable power. But a convenient label cannot replace bespoke bottom-up ESG analysis. We are also cautious about the financial attractiveness of some green bonds given that there is high demand and low supply. This is why we like to use our in-house team to search out other green opportunities that may not have the convenient ‘green’ label.
ESG factors are still not universally looked at or talked about. Companies are generally offering more information and clarity – both on what they are currently doing and what their plans are for the future – but there is more to come. With increased client demand, both the Global Credit and Responsible Investment teams have grown in recent months, bringing in more expertise and offering more scope with collaboration.
“When I’m asked why we brought ESG analysis closer into the investment process, my answer is always the same: why wouldn’t you? I know there are managers who believe that ESG is just a ‘tree-hugging’ exercise, or that this is a fad, but I disagree. An oil company with lax health and safety protocols is more at risk of a spill that could cost billions of dollars in clean-up and fines. A retailer reliant on child labour could see demand for their products crash overnight.
As a bond investor, my upside is almost always less than the downside – if a company goes under we lose everything, but if a company does really well, we still only get the coupons and repayment of principal as promised. So looking for those risks that can really hurt a company makes a lot of sense to me.”
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An article by Ryan Medlock, Royal London’s Senior investment development and technical manager