Justin Craib-Cox, CFA on the launch of the new RWC Sustainable Convertibles Fund and why this strategy aims to help weather market volatility
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In an increasingly unpredictable global economy that could fall into a widespread downturn, investors want reassurance. RWC Partners’ Justin Craib-Cox and Davide Basile, who oversee the firm’s Convertible Bonds team, are dedicated to giving investors stability and a long-term strategy in the face of such turbulence. At the same time, they are committed to providing a sustainable product to investors through the launch of the RWC Sustainable Convertibles Fund.
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This eBook is an Incisive Works product © 2019 Incisive Business Media (IP) Limited
Focus is a publication that brings you face to face with a selection of the most in-demand asset managers in the UK and across the globe.
Investment is subject to risk, including the possible loss of the money invested. Diversification does not ensure a profit or protect against a loss. Past performance is not a reliable indicator of future results. Currency movements can affect your investment returns. For more detailed information about the NN (L) Multi Asset Factor Opportunities fund, please refer to the prospectus and Key Investor Information Document available at www.nnip.com. This is a communication issued by NN Investment Partners B.V. (the “Company”), a Dutch limited liability company registered as an overseas company (registration number FC032623) and as a branch (registration number BR017698) in the register of companies for England and Wales, with its registered address at 25 Old Broad Street, London EC2N 1HQ. The Company is authorised by the Netherlands Authority for Financial Markets and subject to limited supervision by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. The research by AF Advisors has been prepared independently without influence of NN Investment Partners. NN Investment Partners cannot be held liable for the accuracy, correctness or completeness of the content thereof. The full report of AF Advisors ‘NN Investment Partners Multi Asset Factor Opportunities, Peer Group Analysis, June 2019’ can be downloaded from the website mafo.nnip.com.
Important information
IN THIS EDITION
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What is the most urgent dilemma that investors face? Surely it is the need to pursue attractive rates of return while remaining conscious of risk. Portfolios may soon need to withstand end-of-cycle macroeconomic and geopolitical turbulence. In this guide, we look at one potential solution to these contradictory needs. NN Investment Partners Multi Asset Factor Opportunities (MAFO) fund is an absolute return factor fund that strives for capital growth and low correlation to traditional asset classes in investor portfolios. Willem van Dommelen, head of factor investing at NN IP, and Stan Verhoeven, lead portfolio manager in the factor investing team, explain their reasoning and tell the story of MAFO’s performance since 2016 in the face of Brexit worries, US-China trade wars and market volatility.
This document is directed only at persons that qualify as Professional Clients or Eligible Counterparties only. Not to be distributed to or relied on by retail clients. The value of an investment and any income from it can go down as well as up and outcomes are not guaranteed. This document is not a solicitation or an offer to buy or sell any fund or other investment and issued by RWC Partners Limited. This document does not constitute investment, legal or tax advice and expresses no views as to the suitability or appropriateness of any investment and is provided for informational purpose only. The views expressed in the commentary are those of the investment team. The RWC Sustainable Convertibles Fund (the “sub-fund”) is a sub-fund of RWC Funds (the “Fund”) an open-ended collective investment company with variable share capital established under the laws of the Grand-Duchy of Luxembourg. The Fund and sub-fund are only available in those jurisdictions where and when they have been registered with the appropriate bodies. The latest version of the prospectus of the Fund may be obtained from rwcpartners.com. This document has been prepared for general information purposes only and does not constitute advice on the merits of buying or selling a particular investment. RWC Partners Limited is authorised and regulated by the Financial Conduct Authority.
Important Information
No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment
Campe Goodman on how impact bond investors can shift the world into a better trajectory
such as Brexit and the US-China trade war. But will fretting about headlines help them earn decent long-term returns? NN Investment Partners’ Stan Verhoeven thinks not. He argues investors distracted by short-term events should refocus on long-term return targets by building more diversified portfolios.
THE INTERVIEW
Why sustainability in convertibles cannot be a
Name xxxxxx xxxx xxxxx xxxxxxx
Inflation outlook
Source: FactSet
Alasdair Ross, Lead Manager - Threadneedle (Lux) Global Corporate Bond Fund Alasdair is Head of Investment Grade Credit, EMEA. Alasdair is lead portfolio manager across various global, euro and sterling corporate credit portfolios including Threadneedle (Lux) Global Corporate Bond Fund, Threadneedle European Corporate Bond Fund, Threadneedle UK Corporate Bond Fund, and is also co-manager on the Threadneedle Credit Opportunities Fund. Between joining the company in 2003 and becoming a portfolio manager in 2007, he was a credit analyst responsible for covering the TMT, utility and energy sectors, as well as the sterling whole business securitisation sector. Prior to joining the company, Alasdair worked at BP plc in a rotation of commercial roles. Alasdair has a first-class honours degree in Politics, Philosophy and Economics from the University of Oxford. He also holds the Chartered Financial Analyst designation.
In March a portion of the yield curve inverted for the first time since July 2007 – and some investors are twitchy. Led by US treasuries, short-term government debt around the world has been offering higher returns than long-term bonds, a trend widely seen as the most reliable sign of oncoming recession. Consensus is hard to find, however. A particularly decisive flattening in the US market in March led Morgan Stanley to issue a warning to its clients. In the opposing camp, JPMorgan Chase’s Jamie Dimon struck a more upbeat note. He believes the yield curve’s value as an indicator has been muddied by the actions of central banks and regulators.
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For this fund you would look more deeply at the ESG profiles as a check on credit strength
Diversification in any portfolio is most critical in uncertain times. But investors need to focus on the effect any additional investment has on their existing portfolio, rather than simply making sure that any new fund they add is diversified in itself. Traditional investor portfolios are often already biased towards long equity and fixed income. Multi-asset funds shouldn’t add to those concentrations. Instead, Verhoeven argues that multi-asset funds should be portfolio “building blocks” that target attractive absolute returns, on the one hand, and diversification in relation to traditional investments, on the other. “So we make sure our Multi Asset Factor Opportunities (MAFO) fund has no long bias towards equities”, he says, or indeed towards fixed income or any other asset class.
Building blocks
MAFO trades a breadth of assets including commodities – an asset class outside the stamping ground of most traditional multi-asset funds. The nice thing about commodities, says Verhoeven, is that while equity markets are dominated by speculators, commodities markets attract additional participants such as producers managing risk and end consumers. In effect, MAFO, through investing, provides services such as market liquidity, to these participants and receives a return compensation for facilitating this. MAFO doubles up on diversification by applying multiple factor strategies across the various asset markets based on value, momentum, carry, flow and volatility. Factor strategies often have low correlations to traditional investments and low correlations to each other. “If you have one strategy with a Sharpe of 0.25, that may not sound amazing, but if you can create 16 of those with zero pairwise correlations your portfolio would have a Sharpe of 1,” says Verhoeven. Of course, MAFO can feel short-term pain from market ups and downs, with Verhoeven citing energy market volatility in November 2018 as a recent example. But over the longer term, he says, its returns should not be dominated by specific market or geopolitical events. Other segments of the alternatives industry such as hedge funds do access the same markets as MAFO but lack its transparency. “Our strategies are the opposite of a black box: we show a lot of detail about what we are doing and why, which a typical hedge fund will never do”, Verhoeven says. The goal is that investors can place MAFO in their portfolios and understand what might happen.
Doubling up diversification
This deep understanding is achieved by applying a forward-looking approach with ESG analysis, rather than just being reactionary or backward-looking. As a result, the team is better placed to predict the direction in which a company is going and avoid future risks, while also keeping its investment universe wide.
Planning ahead
As such, the investment process lends itself well to the application of sustainability metrics, according to RWC’s Justin Craib-Cox, CFA, who joined the Convertible Bonds team in 2018 and has now re-branded the RWC Defensive Convertibles Fund to a sustainable mandate (RWC Sustainable Convertibles Fund).
Until now, RWC’s convertibles offerings counted a global fund (RWC Global Convertibles Fund), a regional fund investing in Asia (RWC Asia Convertibles Fund), and the defensive fund. The Asian fund is primarily a regional offering for investors wanting to gain exposure to the region with lower volatility than equities, while the defensive fund aimed to take on less risk than the global vehicle.
Seizing the opportunity
the downside risk of the investment.
onvertible bonds are an inherently defensive asset class, sought after during periods of market stress due to their asymmetric risk profile. While aiming to capture as much of the upside of equities as possible, convertibles also aim to limit
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“Most investors imagine that ESG is about using constraints and eliminating names from the universe,” Craib-Cox said. “But what we found was that ESG awareness could be an interesting tool not just for avoiding risks, but also for seeking out returns. It can be an integral part of a fundamental review of a company.”
Knowing what you own means both less risk of default on the bonds as well as potentially higher returns on the equity side, which would allow the team to have a more concentrated portfolio while keeping risks low. However, the small size of the convertible bond universe meant an exclusionary approach to ESG – where certain sectors are completely cut out from the portfolio - was not suitable for this fund.
“Simply by cutting down that universe we didn’t think we were going to give end investors something useful,” Craib-Cox said. “But if we could offer them a much deeper, more integrated view into every name they held, we would be able to show them that we know what we own.”
Other segments of the alternatives industry such as hedge funds do access the same markets as MAFO but lack its transparency. “Our strategies are the opposite of a black box: we show a lot of detail about what we are doing and why, which a typical hedge fund will never do”, Verhoeven says. The goal is that investors can place MAFO in their portfolios and understand what might happen.
“On the one hand, you don’t want names that are going to present a lot of risk or impair credit, so that’s a good first pass,” Craib-Cox said. “Then, as a second pass, what if you could find names that have the chance for a catalyst, something that could move higher?”
An example of applying this approach is the team’s decision last year to sell out of Tesla from its main convertibles fund. (Tesla was not a holding at the time for its defensive convertibles fund.) At first glance, the company could be a perfect fit for a sustainable portfolio, with its leading electric car technology focused on reducing carbon emissions. However, it was let down by governance concerns around its CEO Elon Musk, which eventually led to a drop in the stock price this year.
For Verhoeven, the real success is that MAFO achieved this while demonstrating low correlation with equity markets.** Uncertain times, he argues, are precisely when successful investors should turn off their newsfeed and focus on engineering portfolios to make long-term returns.
market outlook
In a world where sustainability has risen to the top of many investors’ agendas, having a sustainable offering is becoming more and more important. Recent Morningstar figures have found that more than £50bn (1) has been invested in ESG funds marketed to UK investors over the past 18 months to the end of June, and these inflows are likely to continue.
However, Craib-Cox saw an opportunity to achieve something new with the defensive fund, whose investment style made it the most suitable vehicle for a re-focus on sustainability (2). In fact, he said the team didn’t really have to change its investment process: “By its nature, for this fund you would look more deeply at the ESG profiles as a check on credit strength than one might for a much more equity-sensitive convertible bond, that we would hold in the global portfolio.”
However, the aim was not to “jump on the bandwagon” by creating a “one-size-fits-all” approach or a strictly thematic fund. Rather, Justin looked to create a bottom up view, using data on companies’ ESG profiles from Sustainalytics, and other sources to gain a deep understanding of what is owned within the portfolio.
Craib-Cox said: “You have a very engaging, charismatic leader who has this bad habit of getting on his phone late at night and sending out tweets that the SEC fines you for. So it needs to improve its governance before we can think of this as a true, sustainable investment.”
He wants the re-branded sustainable fund to be a “conversation starter” for investors, primarily because ESG investing is a relatively new field, especially when it comes to convertibles, meaning there is no uniform approach. “ESG, socially responsible investing, all these things, they’re not one-size-fits-all right now, they mean many different things to many different people,” he said.
He firmly believes finding the right approach to sustainability in convertibles can not only protect investors’ assets by avoiding risk, but also create opportunities to seek out consistently strong returns.
(2) Effective 30 October 2019 RWC Defensive Convertibles Fund’s name has changed to RWC Sustainable Convertibles Fund as well as its investment objective. Please see the RWC Funds prospectus for full details.
(1) Morningstar as at 5 August 2019
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Justin Craib-Cox, CFA Portfolio Manager, Convertible Bonds Team, RWC
The name shown above is for illustrative purposes only and is not intended to be, and should not be interpreted as, recommendations or advice. No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment.
Justin Craib-Cox, CFA Portfolio Manager Justin joined RWC Partners as a senior member of the Convertible Bonds team and co-manager of the RWC Defensive Convertibles Fund in March 2018. He brings extensive industry experience via Investment Management, Trading & Execution, Equity & Credit Research, and Corporate Development. Prior to joining RWC, Justin worked as Senior Fund Manager to the Global Convertible Bond Portfolio, with peak AUM of USD +2.5bn, at Aviva Investments. He was responsible for global allocation, security analysis and selection, trading and execution and generation of risk-adjusted returns. Prior to Aviva Investments, he was deputy fund manager/analyst at M&G Investments. Justin is a CFA Charterholder, graduated from the University of Virginia and earned a Masters in Finance from London Business School.
‘one-size-fits-all’ approach
Building common standards and ways to report KPIs is Challenge Number 1
‘Sustainability can’t be a one-size-fits-all approach’
RWC Partners’ Justin Craib-Cox discusses investors’ need for a long-term strategy and the importance of sustainability
Why diversification matters
RWC Partners’ Clark Fenton on why diversification is vital during these turbulent times
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fund launch
Risk target/budget
Base currency
23 March 2016
10% long-term volatility
USD
Source: Columbia Threadneedle Investments at 31 March 2019.
Ahead of the curve: reading the runes on risk
• Value • Momentum • Carry • Flow • Volatility
• Equity • Fixed income • Currencies • Commodities
return objective (1 month US Libor)
+ 6%
KEY FACTS
“All peers realised cumulative three-year returns between 0% and 10%, whereas the NN IP strategy is the only factor-based strategy that yielded substantial returns even given its relatively high volatility.” AF Advisors (2)
NN IP Multi Asset Factor Opportunities
“In summary, NN IP’s relatively lean and mean approach towards alternative risk premia investing enables it to charge lower fees versus its peers, but at the same time it is achieving attractive returns against an acceptable risk. As such, NN IP may be considered an attractive alternative within this segment.” AF Advisors
Fund size (mid-basis)
Value, momentum, Carry, flow, & volatility
5 factors
Investment philosophy
NN (L) Multi Asset Factor Opportunities
Gross returns over relevant risk free rate of NN (L) Multi Asset Factor Opportunities versus direct peers (1)
Factor performance (1)
Source: (1) Morningstar Direct (3 year, May 2019) via AF Advisors. (2) AF Advisors, NN Investment Partners Multi Asset Factor Opportunities, Peer Group Analysis, June 2019
NN (L) Multi Asset Factor Opportunities: Key statistics (2)
Source: (1) NN IP Factor Investing team. As at 30 April 2019. (2) NN IP, Bloomberg. Data from April 30, 2016 – April 30, 2019 and quoted in USD. Equities is MSCI World Net Total Return (NDDUWI) and Fixed Income is the Bloomberg Barclays Global Agg. Government Total Return Index (LGAGTRUU). MAFO refers to NN (L) Multi Asset Factor Opportunities I-share USD (gross of 0.81 bps annualized ongoing charges). The indices mentioned here are presented for the purpose of comparing with equities and fixed income, and should not be considered benchmarks.
RWC Sustainable Convertibles Fund
MARKET OUTLOOK
NN (L) Multi Asset Factor Opportunities: Factor performance
Gross returns over relevant risk free rate of NN (L) Multi Asset Factor Opportunities versus direct peers
NN (L) Multi Asset Factor Opportunities: Key statistics
Source: NN IP Factor Investing team. As at 30 April 2019.
Source: RWC, Bloomberg, Thomson Reuters as at 30 September 2019. The historical data is based on the RWC Core Plus Fund from 01/10/2014. (Date the fund was re-named RWC Defensive Convertibles Fund). The Fund’s name was changed to RWC Defensive Convertibles Fund and its investment objective changes on (DATE). Effective 30 October 2019 the Fund was renamed RWC Sustainable Convertibles Fund.
Correlations of NN (L) Multi Asset Factor Opportunities and direct peers vs equity and fixed income benchmarks
Source: AF Advisors calculations based on Morningstar Direct data (3 year, May 2019).
Source: AF Advisors, NN Investment Partners Multi Asset Factor Opportunities, Peer Group Analysis, June 2019.
Source: AF Advisors, NN Investment Partners Multi Asset Factor Opportunities, Peer Group Analysis, June 2019
Source: Bloomberg as at 31st May 2019. *Securities that are not rated by an external source will be assigned a rating by the RWC Convertible Bonds team.
“All peers realised cumulative three-year returns between 0% and 10%, whereas the NN IP strategy is the only factor-based strategy that yielded substantial returns even given its relatively high volatility.” AF Advisors
FACTORS
ASSET CLASSES
5
4
(Gross)
NuMber of positions
Key facts
ESG awareness + quality bias
Historical performance
RWC Sustainable Convertibles B EUR Acc
Source: Bloomberg, 30 September 2019
Marc Piccuirro, CFA
Jennifer Rynne, CFA ESG analyst
Campe Goodman, CFA portfolio manager
Virginie Pelle
fixed income portfolio manager
fixed income credit analyst
investment specialist
Jake Otto, CFA
Meredith Joly
Average credit rating
Delta
YIEld
current duration
70
BBB
31%
1%
2.31%
Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment.
Key features
• 30% delta (equity sensitivity) < 80 holdings, global portfolio Average BBB credit rating • Higher Sustainalytics score vs broad convertibles universe
No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment.
RWC Sustainable Convertibles ESG Risk Breakdown
Thomson Reuters Global CBIndex ESG Risk Breakdown
Credit rating implied*
Thomson Reuters Global Focus Hedged CB TR EUR
VS
Delta contribution by sector
Delta contribution by region
CLICK each map TO VIEW INDIVIDUAL CONTRIBUTIONS
SUM
31.1%
Europe
Asia
Japan
Australia
North America
13.1%
6.4%
3.6%
7.2%
0.8%
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Wellington Management
Justin Craib-Cox, CFA, portfolio manager
Davide Basile, RWC, Head of Convertible Bonds Team
Looking beyond
Name xxxxxx xx xxxxxxx
The factors we employ have three distinct drivers of return
Davide Basile Head of Convertible Bonds Team Davide is the Head of the Team and lead portfolio manager for the RWC Convertible Bond strategies. Davide joined RWC in January 2010 to lead the team and he brought with him a long history in convertible bonds having worked at Morgan Stanley since 2001. At Morgan Stanley Davide worked with in both the Private Wealth and Investment Management divisions, and most recently held the Head of Convertible Bonds position. Davide graduated from Imperial College London with a degree in Material Science Engineering.
What is your investment philosophy?
Convertibles as an asset class offer significant diversification
Our investment philosophy is to give investors a strong level of risk-adjusted returns and exposure to capital markets in a diversified fashion by investing in convertible bonds.
We feel that the asset class is an ideal investment vehicle for investors which want stable long-term exposure to markets while retaining a low level of volatility. Given that convertible bonds inherently offer these characteristics, our focus is to provide investors with a vehicle which only invests in convertible bonds which offer upside capture to downside protection ratio.
Convertible bonds from an investor’s perspective are an exciting asset class given that product can really change during its tenure.
Why have you focused on convertible bonds?
Convertibles perform well over a full business cycle and well over multiple cycles, as the benefit of asset class is seen when both the capital preservation aspects and participation aspects are combined, similar to why having a diversified portfolio should outperform a single asset class in the long term.
How do you see the market playing out in the coming years?
But we lost out in November on the back of a spike in natural gas prices early in the month and later a huge drop in energy prices. So in Q4 overall we went down, like a lot of funds, but actually not in the same months as equity funds. That’s the big message: we’ve outperformed our target over the full three years while demonstrating low correlation with equities.
As discussed above, we think there is a strong case for the asset class from a fundamental basis as we feel markets may be much more volatile in the coming years and having a diversified and balanced asset class we believe should be beneficial.
Is there an opportunity for convertible bonds to provide returns to investors?
Our focus on simplicity enables us to understand the sources of return (factors) that we harvest and what risks they entail. Our approach is built on a robust research process whereby we regularly re-evaluate our strategies to ensure we are not dogmatic.
The individual factors we apply have proven their worth in practice over the longer term and are here to stay. As mentioned earlier, they pick up different sources of returns and hence are uncorrelated to each other (and to traditional investments). So what drives the ability to target absolute return is the positive expected return of factors over the long term and their low pair-wise correlations.
So what drives that ability to target an absolute return, beyond diversification benefits?
In case factor A does not perform in period X then, since factors are relatively uncorrelated and have long-term positive expected returns, it is likely that factors B and C will perform - so on a net basis there is an absolute return.
MAFO is built on active research to find, assess and review the factors used in the model. We implement the model on a daily basis to optimise its performance. The real point is that factor investing must be systematic: the strategy should deliver the exact same thing in the future as in the past, given the same market environment. Markets never stay the same, of course, but the contrast with traditional discretionary managers is clear: they can change their opinion and react quite differently to similar markets.
So is factor investing passive or active?
There are three key steps to imposing discipline. Every factor strategy we include in our portfolio must have a clear and strong economic rationale and academic underpinning; must have proven itself over the long run, in and out of sample and across asset classes; and must offer attractive returns taking into account implementation costs.
Is a disciplined approach easy to build given that the growing number of factor approaches include some that seem spurious or that side-step real-world issues, e.g., implementation costs?
You do have to build a rigorous research process – and you do have to stick to it!
OUR RESEARCH PROCESS
Idea generation
Data collection
Testing base model
In-depth research
Implementation
Periodic review
Fully systematic process
Investment process
Efficient implementation and execution
Detailed risk monitoring and reporting
Dedicated factor investing team MAFO is managed by NN Investment Partners’ factor investing team. The seven-strong team of portfolio managers combines quantitative research and portfolio management, working closely with NN IP’s trading team and the centralised innovation and data team. They are led by Willem van Dommelen and Stan Verhoeven.
Click for van Dommelen’s view
Additionally, we think there is a compelling tactical argument for the product as we are seeing cheapness in the product currently, which means that investors are paying little for the optionality on markets.
Davide Basile, Head of Convertible Bonds Team, RWC
We do not hold any other instruments such as equities, bonds, structured products or CDSs for example and hence focus on the attractive nature of the asset class and simplicity is at the core of our philosophy.
As an example a convertible gives the investor the ability to receive shares as opposed to a bond at maturity. Hence if the underlying company does really well the value of the convertible can appreciate substantially as there is no technical limit to the upside of the stock price. However if the stock does not perform well the investor has the right to receive their money back as the convertible is a bond from a legal perspective.
Given this dynamic when analysing convertible bonds, each individual security can either be more equity like or bond like or it can behave as a mixture of both, i.e. in the balanced range, making the analysis of each individual convertible intellectually stimulating and never stagnant.
Convertibles as an asset class offer significant diversification as they combine the exposures of equities, bonds and optionality in one product, and hence as markets are more volatile, the value of the asset class is enhanced.
As we look forward we feel that at some point the business cycle may turn and markets could start to experience more volatility. We have had a significant period of market appreciation; economic data and political instability over the next 10 years are likely to provide an environment which could be substantially different than the last 10 years, creating a strong case for a diversified product positively exposed to volatility such as the convertible asset class.
This has the effect of making the upside/downside ratio for convertibles much higher and hence the potential to provide strong risk adjusted returns for investors.
Investors are paying little for the optionality on markets
