Benefits of a flexible, multi-sector approach.
For many years, Dutch pension funds have made a strict distinction between matching and return portfolios. While a matching portfolio mainly invests in safe bonds, usually European government bonds, a return portfolio allows a portfolio manager to go much further on the risk-return spectrum in order to achieve returns above liabilities.
Pension funds often use specialist investment managers for each of the different areas on the credit spectrum, such as European or US investment grade (IG) credit, high yield (HY) or emerging market debt (EMD). These pockets of a portfolio have their own characteristics and investment managers are required to adhere to specific guidelines set by the pension fund.
As a result of the COVID-induced market turmoil in March and April 2020 the IG credit market saw a remarkable amount of downgrades—a total of 649 bonds across 96 different tickers and companies in the Bloomberg Barclays Global Aggregate Corporate Index. IG credit managers were forced to sell large positions as credits no longer met the requirements of their specific mandate. However, these “fallen angels” looked quite attractive from the perspective of a HY manager due to their strong fundamentals. What happened in many cases is that these securities remained in a pension fund’s portfolio but moved from the IG to the HY pocket. This could have been done more efficiently—and without unnecessary transaction costs—in a combination or multi-sector portfolio.
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To discuss further, please contact Martijn Hoogendijk, +31 (0)20 504 25540.
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