Fund disrupter firm, Simplicity, has sold down its global credit investments due to a lack of suitably-priced screened options.
Simplicity chief, Sam Stubbs, said the $100 million plus passive investment scheme operator exited its holdings in the Vanguard International Credit Securities Index product “a couple of weeks ago” to avoid exposure to companies linked to controversial weapons and other excluded sectors.
“We did ask Vanguard if they could come up with a [screened] credit fund option but they told us it would be too hard,” Stubbs said.
According to its website, Simplicity “excludes tobacco, landmines, cluster bombs and nuclear weapons from its investments”. While the start-up manager was one of the first to sign-up for the Vanguard screened global equities fund last year (fast-tracked into being for the NZ market following a media uproar over cluster munitions exposures in KiwiSaver schemes using index funds), Simplicity retained exposure to some of the tainted firms via the credit product.
Stubbs said until Simplicity could source a reasonably-priced global fixed income fund that screened out banned companies – based on the NZ Superannuation Fund exclusions list – it would source all credit exposure in the NZ market.
Following the move, Simplicity would manage the NZ credit investments in-house – focusing primarily on bank and local government instruments – while maintaining half of its fixed income exposure in the Vanguard global sovereign bond index fund.
“Overall, we will still have a 50/50 spilt between credit and government bonds in our fixed income portfolio,” Stubbs said.
While the shift away from global credit would “in theory” lower the scheme’s diversification, he said the credit quality had ticked up slightly as a result of the shift to NZ-only securities.
“We had a look at a few [non Vanguard] screened credit funds but we felt the premium they were charging for ESG [environmental, social and governance] was not justified,” Stubbs said.
Tony Hildyard, head of the newly-launched Hunter Funds, said an active global credit fund would typically set wholesale investors back something in the order of 40-50 basis points in total annual costs.
Hildyard said the first Hunter fund – managed by global bond giant PIMCO – was an active international fixed income product with a bespoke screen that excluded all tobacco manufacturers as well as firms linked (above a certain criteria) with controversial weapons and fossil fuels.
“It’s not that hard to filter out but you have to be careful how far you go [in excluding] and be aware you might be taking on other risks,” he said.
As well as the explicit screen for the Hunter fund, Hildyard said PIMCO takes ESG factors into account in its initial fixed income securities selection process.
He said investors should be aware of the difference between ‘ethical’ funds – that may exclude certain investments on moral grounds – and ESG investing per se.
“ESG should have a survivor bias,” Hildyard said. “If companies follow good ESG practices than in theory they should be more likely to repay debt and survive.”
He said NZ clients have been attracted by both the internal PIMCO ESG processes and the specific screens in the Hunter product.
PIMCO itself launched a screened ESG global bond fund to the Australasian market – its first in the region – last month, which would likely count the $200 million NZ Anglican Pension fund among its early adopters.
In a release PIMCO says the new fund was “launched to meet demand from clients looking to incorporate responsible and social considerations in fixed interest investing”.
“The process not only excludes companies with business practices that are misaligned with sustainability principles, but also evaluates their ESG credentials and favours those with best-in-class ESG practices,” the release says. “Further, the team engages collaboratively with companies, encouraging them to improve their ESG practices and influence long term change.”
Rebekah Swan, AMP Capital head of distribution, said it was encouraging to see investors zeroing in on the ESG elements of fixed income as well as equities.
“People have tended to forget about fixed income when considering ESG but because responsible investing is more integrated in our business we take it into account across asset classes,” Swan said.
Last month AMP Capital moved to exclude tobacco and cluster munitions across all its portfolios – including external manager mandates – after implementing a new ESG policy.
The NZ arm of AMP Capital was already ahead on that score after dumping controversial weapons from all its portfolios earlier.
Swan said the exclusions also applied through the AMP Capital passive mandates that – until next month – are managed by State Street.
Last week AMP Capital revealed that the A$17 billion passive management mandate currently held by State Street would transition in May to UBS Asset Management, a firm not previously considered one of the main contenders in the index investing space.
The deal was one of – if not the – biggest mandate swap in Australian financial services history.
Swan said the ESG policies would continue under UBS.