Masterclass | Fixed Income

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  • 48 mins 02 secs

Learning: Structured

As we enter the last part of the year, we take a look at the outlook for fixed income. On the panel are:

  • Rachel Harris, Senior Investment Director (Credit), Aviva Investors
  • Nick Hayes, Fund Manager, AXA Global Strategic Bond Fund, AXA Investment Managers
  • Bryn Jones, Head of Fixed Income, Rathbones

Learning outcomes:

  1. How great a threat inflation poses to fixed income investors today
  2. How bond managers are looking to identify long term corporate cashflows in the wake of Covid
  3. The growing role of sustainability in running fixed income portfolios
Channel: Masterclass

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It may contain errors and omissions.

Mhm. Okay. Hello and welcome to asset TVs masterclass with me marco get in this program. We're looking at the outcome or the outlook for fixed income particularly, we enter the final third of the year and to discuss that I'm joined here in the studio by Rachel Harris, she is Senior Investment Director for Credit at Aviva investors and also by Nick Hayes, manager of the Alexa Global Strategic Bond Fund. We're also joined down the line by BRyn jones BRyn is the head of fixed income at breath Bones. So without any further ado, let's get things underway and start by finding out a little bit more about today's panelists. Ready, let's start with you seen Investment Director for Credit. Tell us a little bit about how Aviva investors runs credit and what some of the key issues are for the team at the moment, brilliant thank you and thank you for having me today on this gorgeously sunny morning in London. Um So in terms of how we run credit at Aviva investors, there are effectively three things that we will keep coming back to the first is we will talk a lot about portfolio construction and this is about not only thinking about what credits, great credit ideas were taken from the credit analyst but also how we actually structure them into a portfolio. So really thinking about how you're um blending that idiosyncratic risk with how does a credit portfolio actually work. Um The second thing that we'll talk about a lot is around E. S. G integration um and increasingly around sustainability and one of the big things that we like to talk about a lot at the moment is climate. So our insurance parent has just announced an ambition to be net zero by 2040. And that's something that we're talking about within our portfolios as well. And the final thing that we will talk about um is probably something that you'll hear from. Quite a lot of asset managers. So we like to talk about our global platform. So we have portfolio managers in um in europe in north America in both Chicago and in Toronto and we have portfolio portfolio managers in Singapore and it's really about bringing all of those views together. Um In terms of the platform itself we run portfolios across investment grade, high yield liquidity by maintain credit and emerging markets. So a very broad platform. Thank you Nick. As manager of the global strategic conference, that's a little bit about that product. What are the various levers that you've got to uh to manage returns and risk for clients? So thank you, thank you again for having us. I mean the strategy is basically a multi asset fixed income fund so we have the ability to have exposure to rates, credit, high yield and emerging markets. My background is more rates and credit but certainly I used the capabilities of our global high yield team and global emerging market team put all that together as Rachel's touched on portfolio construction is incredibly important and the way we think about the strategies to try and deliver sort of, you know, use fixed income as a growth assets are trying to deliver attractive risk adjusted returns in a world where yield is pretty thin on the ground. People are skeptical about whether you can make money in fixed income, but we certainly still think there are opportunities, but you need that wide spectrum of opportunities um, to sort of pull together and put together a diversified portfolio fixed income. Thank you. And finally Britain, thanks for joining us today. I'm just picking up on that point from uh, nick, can you make money in fixed income? How do you go about doing it? Yeah, thanks. Well, thanks for allowing me to be carbon neutral and do this from my home for all renewable energy as well. So I don't have to travel for an hour and a half to the studio. Yeah, yeah, you can, yeah, a lot of the time fund managers, especially those around the table today, playing a relative game anyway. You know, we're not necessarily as allocators as in away from equity or, or other assets. I'm not going to be here to say where bonds are going to outperform in the asset class, but within the asset class. Yeah, there are many different ways to, to find value in particular. Uh, we can look at yield, roll down, you know, you buy 10 year bond in two years time is eight years and the yield falls that effectively get some capital appreciation. And so being able to play the curve is an interesting area and that's what we do a lot. We spend a lot of times looking at where the best value on the curve cross currency is after hedges. But also from evaluation perspective, one of the things that we we built many years ago as a proprietary model that looks at the Sharpe ratios of individual assets. So looking at the risk adjusted returns you can achieve. So yeah the pants here or that the optimum investment and credit is is one that you'll do low, that's got very low levels of volatility. And of course one of the problems with credit is further the duration you get more volatility. So it's being able to find the yield in the right context of risk and and that's where we tend to outperform their peers where we're able to find value on the curve. Uh good quantitative analysis on top of all the other fundamental analysis that is done. Okay thank you. That's a little bit of an overview everyone how they run the money. But Rachel as you look at the markets at the moment is now a time where the managers are getting a lot of their return from individual stock bets or idiosyncratic risk if you like? Or is there is this more one where you've got to work out with a big trends are and get them right track credit. So I think the way that we structured portfolios, we will always talk about idiosyncratic risk. Um and that's where that portfolio construction piece comes in. That actually Britain was talking about the knicks alluded to as well. Um So we will always talk about idiosyncratic risk. I think right now it is absolutely critical to nail the individual stock selection because sectors and the whole credit market is effectively trading in lockstep. So yes, you might get a little bit of compression decompression between investment grade and high yield in developed markets and E. M. D. Might be trading slightly differently. But if you start looking at health care sector or the telecom sector, it's actually quite difficult to differentiate between the credit. So for now it's going to be around making sure you're nailing the idiosyncratic risk because if spread start widening then actually want to make sure that you're in the more resilient credits. So that for me would be the absolute the key way of just thinking about how you should be managing your money right now. But that's the credit side, government bonds side nick, can I bring you in on that? What are some of the big themes risks and potential rewards that you're looking at that market? If you give us a broad overview of where we are today. First thing to say is that we do use government bonds duration in the portfolio, dial it up, dial it down depending on our sort of broad macro view and whether we think we can make money out of it. I think it's not only about making money in, by using government bonds and duration, I think they also play a really important diversifying role within credit and high yield. I think they definitely dampen down volatility and also have quite a low correlation to credit and high yield secondly, um you know, there's a lot of talk about the big reflation trade at the moment, there is an expectation that we will see less QE and at some stage rising interest rates in the key markets. So there was a big period of the early part of this year where rates started to rise and people got really worried that you could see a reversal of some of the big multi year, multi decade rallies in government bonds that kind of reverse quite a lot in the last 56 months. So we're kind of using duration at the moment, has been playing some of that momentum yields are not going down. In fact, years are going sideways if not going lower, so there is strong reasons why they're rallying for us. It's not so much owning the asset because we think it's cheap, but it's only because there's strong sentiment and technical reasons, you know, very simply demand is greater than supply and government bonds. There's there's a lot of government bonds out there, but there's arguing not enough considering how much demand there is from QE demand from big institutional pension funds and even sort of benchmark investors who find themselves underweight, it's gone against them and they've been buying back duration. So it's not everyone's favorite asset class, but we like government bonds, I think the place for it in the portfolio And how do you assess how long that demand is likely or that that demand outstripping supply is likely to last for. I mean, it's something we've discovered. I've only been doing this for 20 something years and I think for most of that period we've talked about how government bonds are expensive, but that she keeps getting more and more expensive as far as we can see that the the the the excessive demand through QE QE is not going to go away anytime soon. That massive institutional demand is probably not going to go a very aggressively. And even every time yield pick up, you just find a wave of new buyers that come in and by the market. So for us, we think we're in an unfortunate situation where yields are probably going to stay very low for a foreseeable future. That means there's opportunities. And brain has talked about, I'm sure we'll talk later about opportunities across the curve or cross market, but there is certainly opportunities in rates. And I think yields just stay in this very low environment for quite a while. You touched on inflation, I'd like to come back on that as a as a topic in a in a moment in of itself, I think it's a really important debate. But before I do, just back to this issue of stock selection, idiosyncratic risk, could you give us an example of something you're doing in uh ethical bond fund, for example, which is the real one of the key funds there at Wrath Bones? Yeah, I mean it's a very yeah, it's a it's a very active fund, so it's a non benchmark funds, if we don't like a sector, we just well known it. So unfortunately going into Covid, we have no retailers just on the promise that we felt that people were probably more likely to shop but home and they were going to shops in the future anyway, so, you know, that's kind of the theme where where we were and we were invested in things like pro lodges and logical that final mile delivery, which really got boost from from Covid. Um We look a lot of teams around millennials. So If you look at Jim Jim Reed's age of disorder uh from Deutsche Bank credit research talks about beyond 2030 for 2035, all the polls will be controlled by millennials and the future generation, the old baby boomers, the silent generation would have died off and those policies surrounding those are much more left to center much more liberal, so more E. S. G. Focus more sustainability. So We're kind of focusing on longer-term trends. One of the big ones we've been doing for about 10 years is something called Anthropocene where we're looking at the humans having a big impact on the climate, biodiversity, destruction, environmental damage, renewable energy. So we've been kind of investing in that social housing, where are we going to house key workers, et cetera. So we can't look at these these big overarching themes. That's one way that we go out there. And then we look a lot of regulator. We always think regulation has a big impact on assets and understanding the covenants within the bombs to understand how regulation is going to impact whether that form can be kept outstanding or not. And in particular one of the areas we focused on over the last, Well since 2008 has obviously been changing the capital structure of banks, uh being able to take quite hefty positions in some of the legacy tier one bank there, and some of the discounted perps which we felt were no longer going to be able to be kept as regulatory capital and a lot that's not been taken out significant upside to where they were trading. Um And so that's the kind of some of the themes big overarching themes and then trading them with huge amounts of conviction because we don't have, but we're not benchmark constraint, which is what you want from a truly active manager. Okay, thank you. Uh let's come, I promise to come back to inflation. So nick can I can I bring you in on this one first? Um How worried are the markets by inflation the moment and how worried should they be? I think certainly less worried than there were six months ago. Uh And probably it is now one of those worries that's so ingrained in our psyche that people kind of have a reasonably high expectation of inflation and where it might go. The key phrase that you've heard sort of throughout this year is the transitory nature or not of inflation whereby given the where we were 12 months ago and 18 months ago in the depth of the covid crisis, that sort of growth fell off a cliff. We moved into a deflationary world, There's clearly been a massive bounce back. So in the next 1218 months you've seen a huge pickup inflation so people are starting to reassess their expectations for inflation. I think there is a general consensus view that inflation will stay high for a little period of time. But then and say the transitory nature of it comes down and probably it normalizes back down to maybe in and around 2% in sort of you know, U. S. U. K. And maybe europe might be slightly below that. But I think we're in this very uncertain period where inflation has been come from a very low period in 2020 massively spiked up which we're seeing the data come through and some of that is the base effects, some of that is just to pick up in demand, pick up in growth and pick up in spending. But I think there is a key expectation that that comes down which is something we agree with. I think that the key for us though is everyone talks about transitory inflation, everyone talks about the sort of the base effects. But I'm not sure there's a great consensus to what transitory really means and how long we expect inflation to be slightly higher. So I think we have some underlying concerns that maybe inflation stayed higher for a little bit longer than people expect and then comes down. So in that environment was quite like inflation breakevens we like buying you know inflation linked government bonds where you get some protection against that. And also inflation should be good much further down the credit curve. So very short dated bonds buying high yield and sometimes emerging market debt is quite a positive pro growth pro inflation type asset within fixed income to you. So that's the kind of things we're thinking of at the moment Britain, I know you've got a strategic bond fund, their Rathbun's. You similarly keen on inflation linked bonds at the moment? Well, I mean and and the UK focus no. Breakevens are very high. Um And also we've got the C. P. R. P. I wedge uh possible change uh added to that index links have very low coupons. Um And what you tend to find is when you're drives, they have very high complexity in the next league, we do feel that common bond yields are too low. We do feel that uh growth will pick up and then when you get rising inflation and you tend to get higher yields. So we've kind of stepped away from the Lincoln market because of that. We did think tips breaking is that really cheap cut over the last few years? But they started to expense enough a bit. I think the area where we find japanese inflation monsters pretty interested. Um That's one area we might invest in inflation, but otherwise we just, we just think that breakevens and we'll be able to to go. So we kind of avoided avoided both the duration and in co exposure as a result. Mhm. And what's your take on how long the short term is when it comes to inflation is picking up on expert Yeah, inflation is a tough one bit on the fence to be honest. I mean, this whole transitory figures the word and I don't agree with nick in that respect that, you know, how long is transitory is it one year? Is it two years? Is it three years? I'll give you some anecdotal evidence particularly UK. I do think, I haven't said that I'm underweight thinkers. My experience as a result recently the summer holidays is that we just can't get staff in particular, service sector, hotel qualities declined, You know, they're, they're struggling to find waiters and cleaners and etcetera and that's what I'm going to have impact two things one, the quality goes down. But at the same time obviously the price is going to go up because everyone's staycation in and you know, the demand in the UK is picking up at the same time. They're gonna have to extract someone from no disrespect from a from a fast food chain or wherever to come and work there. They're gonna have to pay more. And so I do think that's a combination not only of uh, the increasing demand, but also ironically, as an increase as a result of Brexit, you know, there's been many, many Europeans that have had to travel back to europe. I was talking to the guy who was a tailor who was going on all the labels for the kids going back to school and it was almost impossible with lots of the staff back to europe. So I mean they just anecdotal evidence growth picking up inflation picking up. I am kind of thinking that is less transitory than we think and that there might be a little bit more in grade inflation coming through and in particular if Covid does disappear and vaccines work, which which is ultimately ultimate goal. Um, then that could be increasing the inflation while you've got so much QE and fiscal policy support, infrastructure spending us, it could come through pretty quickly Yes, I'm earning more on the side of a next side, but that doesn't necessarily mean I'm going to be long blinkers because I think it has a bigger impact on the duration. Thank you Rachel. How do you think about this? I can call it d globalization, Whether that's sort of Brexit in the UK, whether it's a result of covid, whether it's a result of what we've heard about sort of supply chains and the rest of world relationship with china, how do you factor that into the long term inflation picture? I think you used the word D globalization. And the first thing is that yes, you've got that impact on supply chains and just as brian was saying about Brexit, so getting stuff from the continent to the UK now is, you know, an awful lot more difficult than it was pre Brexit, but at the same time, the one thing and we can't get on a hop on a plane and go to the US in the way that we we would have done historically, but at the same time, the one thing that we have noticed is technology has allowed us to do things like we're doing today. So bring, you know, we would never have done this for 22 years ago or 18 months ago, we would never have had bring on the line and two of us in the office and now brings made me feel really guilty about my carbon footprint for the fact that I drove 10 miles the station this morning. Um So um so you wonder, don't you? Is this d globalization or is it globalization? But just in a different way from how we've done it previously. Um I think with regard to what both nick and brian was saying about inflation. You know I work within the credit environment and so inflation is obviously impactful with regard to sectors and how that's going to feed into sectors. But we tend to try and avoid using too much sort of macroeconomic pure macro economic growth and inflation forecasting within how we run credit portfolios because we think that our clients want us to run credit and not try and get the interest rate duration piece right as well so but our our overall sort of house view in terms of inflation is yes we expected to see it pick up just as it has done at the moment. We're expecting to see growth pick up a little bit more obviously has been dampened for Q two and Q three because of you know the delta area that's come through which was always one of those random things that might happen and might continue to happen. Um So I think with regards to inflation and how we're positioning portfolios at the moment with somewhat sitting on the fence right now. So we expected to see it pick up um like bryn, we're just not quite sure how transitory to overuse that word. Again, these effects are going to be into 2023 but I think the d glow, I'm not sure we're actually d globalizing. I wonder whether we're just globalizing but in a different way can I throw one more sort of big inflation idea is a bit about but Okay, well you mentioned, you mentioned uh sustainability and climate transition As you look out, not this year or next, but over the next 10 years, 15 years we're seeing growth, rising populations in particular emerging markets. Do you think food price inflation will become a much bigger component of inflation globally? And particularly at a time where if natural systems are under stress, food will become an ever larger part of people's households spend and inflation basket than it is tradition in the west. So I'm going to give another classic. Yes, no answer on this one. It depends on what happens with the technology. So so much around climate transition is around that piece around, you know, what solutions are you providing to the fact that, you know, frankly the piece around, can we mitigate temperatures feels a little bit like we've left it too late to do that. But how are you adapting to a warmer world? So what can we do around technology to mean that we can still get food into people's mouths. And is that an inflationary thing or a deflationary thing. I think frankly at the moment we just don't know because we don't know how far advanced those technologies are going to be. But what we are seeing is around companies that are providing solutions, they are running ever faster and faster and faster to try and provide solutions whether it's about food or air conditioning systems or desalination of water, which again, would then lead into kind of food provision, there's a kind of constant, almost positive feedback loop going on in some sectors at the moment. So I think it's, you know, it's a bit Yes. No. Yes, it could. But if we can get the technology right then no, it won't. So sorry. Yes, no answer. Okay, it's still up for grabs. Um One thing just, just sticking with inflation just for a moment, I guess crucial is the role central banks playing this nick. What's your take on how the attitude of the Fed and how blinding a game is it playing at the moment? I think, I think they've got to be reasonably happy with the way that yields have risen without the rest of the world sort of falling over or stopping to evolve because we all know that central banks are, let's say controlling or influencing markets to an enormous extent they are keeping yields low. We got to a period where sort of Treasury yields have doubled in a relatively short period of time and that had happened at the same time when credit spreads were reasonably well behaved and equities were still going on. So I think the Fed are reasonably happy that they've managed to allow the taper conversation to happen. And people's expectations of taper now is that happens probably towards the end of this year, maybe at the start of next year. But I think you've got to differentiate between taper conversation which says the Fed will stop adding to buying more bonds as opposed to where ultimately they need to get to. Which I think is quite a long time away. Which when they start raising interest rates, if you go back pre 2008 when no one could spell QE little I knew what it was. No one. Everyone just assumed that interest rate rising or falling was the only tool in the box. Now they have so much more tools and I actually think that you know we can get through a period of paper you can get through a period of yield curve control at some stage maybe. But ultimately rising interest rates, I think it's gonna be quite a long way off in that environment. That's why we think yield stay low for for quite a foreseeable period. What's your definition of a long way or I think it could be 34 years. Yeah. Yeah. U. S. U. K. In that kind of time horizon. I think there's an expectation that maybe it's two years away but that two years, two year time horizon could be a role in two years I think the complexity of getting from here to there I think is pretty complicated. So say the market is probably pricing in sort of two years away but I think that could be pushed out further. Okay thank you know we've had a question in so I'm gonna put this across to uh brin Britain quite a long question. But I think the essence of it, if I'm being fair is what's your take on floating rate notes these days given what you've been saying little earlier about inflation. Yeah I mean places all in the olden days were quite useful Because you know when guilty or reloading six and you can get 5% or 4% from a floating rate. no with refrigeration of course of the year it was quite a nice place to park some money floats. Is now obviously done at the front end. They're not going to be yielding you a great deal. Um Good quality ones, maybe up to half of the sandwich. You can pretty much get bank account anyway if you were but reach an investor. Um So and of course you're carrying credit mess with those. So um they don't really provide as much use in terms of income very mind if you can buy it Decent subordinated financial and 4% yield or 3% yield You're losing 20 or 30 basis points of carrier a month. Um so, so, so whilst they were quite useful in the past, I mean if you was expecting not what Nick was saying, expecting interest rates to come through rises pretty quickly. Then there are good defensive measure measuring a portfolio party cash in floaters, watch the yields right at the long end. We get big negative returns and then we invest out the floaters into higher yields at a later date. Um, uh, in the contest was never saying yeah, in the short term consume rates going up aggressively in the short term in this, as I said, unless Covid disappears and suddenly we've got all the stimulus that will need to be cut much more quickly. The we expect at the moment. Okay, thank you for that. I don't think we covered quite a lot there on inflation racist. We've on another topic I want to focus a little bit more on, on corporate bonds. So, um really, I suppose the topic look at it is one of the sectors, What are some of the areas you're looking at to lend money to companies that have got solid future corporate cash flows to pay those interest payments. And how has lockdown in our path out of lockdown? Perhaps change some of those assumptions that you might have had a few. So I think when I think about sectors and post Covid or even in Covid, um, it feels quite intuitive. So some of what Brynn was saying earlier, he was talking about, you know, it's felt in the UK over the summer, like, you know, you just can't get the staff. So suddenly we are seeing people go back into restaurants um and actually restaurants in the front end where they're relatively high yielding because they've been beaten up quite a lot is something that we would like at the moment. Um some of the retail sector as well. Um And this is where it goes back to sort of idiosyncratic and being very careful about how you sift through the names that you're looking at because not all retail is built the same or has quite the same online presence probably. Um So I think it's also thinking about, you know, through Covid would have been the really resilient sectors and again they feel intuitively obvious, right? So we've all started working from home more. We've all needed wifi more nick. And I were talking earlier about the joys of wifi and home working. Um One of my colleagues in the U. S. Says that quite frankly his wife and Children would rather see the water turned off than not have full on wifi in the house. So things like telecoms and media are, you know, a relatively defensive and have been a very resilient place to be throughout Covid and I think that's going to continue again, some of the utility companies, but with the utility companies, what we would start to look forward, the utility companies is which ones are tackling the climate transition well so which are well poised to either um look to or have already given us a plan about how they're going to shift towards renewables because what we don't want to be doing is investing in you know dirty fossil fuel companies that frankly haven't even thought about climate change yet because they're the ones that are going to end up with stranded assets and that's not really where you want to be. Yeah. I think I think the other thing we've seen with Covid is that the sort of the traditional views or from the previous crisis? What is high beat And what is Lobito has probably changed a little bit as well. If you go back to the financial crisis clearly was all about the banks and the amount of leverage in the banks this time around, they became part of the solution. Not the problem there. They were much better capitalized. The government's probably looking to them to start to fill the gap and and try and keep the wheels of finance going. So actually banks and insurance companies stood up pretty much better than people might have expected. Conversely, you look at businesses like airports, you know, no one expected the 23 largest airports in the U. K. To have had a questionable future around them. But that's kind of where we got to. And the bond market started to price that in. So I think as ever with a different crisis comes a different market solution and a different market makeup as to what is high and low beach. I think that's where it's pretty exciting from our perspective, talk about what what Rachel said about stock picking and doing the analysis that picture ever evolved depending on what crisis we're faced with. Okay, well just sticking with the beat up sectors. What are some things that you look out to work out what the differences between value on offer and a value trap? I mean, I don't know if you looked at airports, but you know what made you think actually we lend money to Heathrow but we wouldn't let a couple of ways a couple of days. I look at it first of all from a sort of top down perspective, you know, do we want the sort of covid recovery names or do you want the sort of the non covid effective names? So covid recovery might be some restaurants might be some travel related businesses that the non or the covid positive names might be the technology type sector. So that's a very, very top down from a slightly more bottom up where I start to think about value is we look at the difference between credit, high yield, high yield within emerging market and developed market and within their, you start thinking what is really priced in and what's not priced in and what we found is in the sort of the second half of 2020 we were diving into the high yield emerging market companies looking for the sort of covid recovery names where there's pretty attractive spreads. Um and there was a sort of reasonably high price of default priced, a probability price of default priced in. That may or may not happen where you got to in 2021 is a lot of that default price started to be priced out. So we started improving the quality of the portfolio. So we started going into still some covid recovery type names, Pub sectors, airlines, airports, but kind of the investment grade flavor rather than the high yield sector. Because I say, when you look at the overall mixture of spreads and yields, yields are pretty low and spreads are reasonably tight because we've been, you know, whatever it is, 18 months or so into this crisis, the response from central banks has been absolutely huge. So we've just spent a lot of the last 68 months improving the quality of portfolio and buying investment grade still covid recovery as they have talked about some of the consumer related sectors which are bouncing back, but they just have a slightly lower better than some of the high yield equivalents. Thank you. What's your thought on covid recovery? Finding value? Uh finding value in it, particularly when we've got something like the delta variant around, which which, you know, we, uh clearly very contagious and can clearly put, uh, has health implications, but obviously some very negative economic implications as well. Yeah, sure. I don't think they'll very being lost to be honest. Um, really great book actually, it's on my desk here is, uh, what about vaccines? Callbacks is, um, talk about Astrazeneca, uh, vaccine. And it's pretty interesting that their the platform really because of MERS Middle Eastern respiratory syndrome. I think the problem with Dell variance and variance is that the Covid now is, is out there and it's going to continue to mutate. It might you tend to find that actually what happens with most viruses that they actually weaken over time because what they want to do is spread more quickly and if they kill their hosts, then, um, they don't spread. So we'll probably find that I, I personally think Covid will be here for a while, but it will get weaker over time. Um, so that's that point on variance now, how we react to that as a society. If you go back to the great barons and debate, it was more case of protecting the elderly and low and everyone else or elderly and weak there and everyone else to go about their normal lives, which didn't happen. And so the complexities about, about Covid, I think and Covid recovery are quite complicated. Bear in mind also as bond investors, you know, the downside is 100% and a lot of side effects the is if we're really clever, a bit extra than our yield, but basically the yield. And, you know, it's an equity investor. The Covid recovery could have been fantastic by saying that it could be 1000% um, as we saw on a number securities. So I'm a little bit more cautious on Covid recovery investing because the enhancement in the field you get is not significant. Uh, and it comes back to the point about longer term investing in sustainability and looking for. So good companies that slightly cheaper than the market is hot rather than taking pants on businesses that could ever found or do really well. Okay, thank you brits, Just coming back on something you were saying there about around corporate, but I think you mentioned about keeping out of fossil fuel companies, I'm why somebody might say, well actually they've got all of this capital and expertise in energy, surely you want to try and convert them to do better things. And secondly, everybody uses their stuff, we all use their stuff now, so we use their stuff for now. And I think we can use the terminology fossil fuel in a very blanket way. Right? So, so there are various different revenue thresholds and tolerances that you can have around it. I think you're absolutely right that, um, you do need to be engaging with some of these companies. Um, so there are a number of the sort of former monopolies within europe who have actually done a really really really good job in terms of mapping out how they're going to get rid of the fossil fuels over The future 5, 10, 15 years. Um You're getting a real geographic disparity and I'm talking in developed markets here, so between europe and the U. S. There's a real geographic disparity there. Um and I tend to try not to talk about this too much if I'm talking to us audience because it then becomes very political and quite emotional about it as well. But there's definitely a difference between the two there. But what we would be looking to do is um ruling out probably the worst culprits. But those those companies where we think they're open to being engaged with, we will be engaging with them. So we've got a really good history on the equity side of things as being activist. Um uh as being active owners voting against policies that were not a fan of them, were really trying to build on that from a fixed income from a credit perspective as well. So, um, You know, even within something like our climate transition range, 90% of the companies that we own in that have a fossil-fuel exclusion piece, but 10% we're trying to pick the best companies that we think are on a really good sort of transition trajectory already in terms of trying to phase out those fossil fuels. And what about if it were saying integrated oil company that said we are issuing a bond because we want to use the proceeds of that bond to invest in carbon capture and storage. We've got, we've dredged vast amounts of carbon out of the North Sea and we're looking at how we can push it all back in there, cover it all up. And if anything ever goes wrong, we've got the expertise to plug, plug the hole. That's what we want to do at this stage. Would something like your transition fund be able to invest in that kind of bond or is that still beyond the pale? Yes. So I think so now we're into the territory of green bonds and all that other lovely sort of alphabet e spaghetti that comes out without, you know, you know how much we love a new bonds name don't wear the mood is lifted in the room, you know. Exactly. So I think I think with green bonds um first of all there's all this discussion, a horrible phrase. This thing about the greenie um you know, are you actually being paid for it properly? So that's something that you would need, you know on paper, what you're saying to me, could we do it? Yes, we could would we, I don't know because it depends what we're being paid to do it. Um And also, you know um brian talked about covenants. Um The problem with some of the green bonds that we're seeing being issued is that the green bond is issued, its for a tiny part of the business, it's sort of ring fence but you're not actually seeing the culture of the rest of the firm shift. Um intuitively what you said to me, I'm like yeah I'm in you know we'll do that carbon capture, we think it's actually going to take emissions out of the atmosphere because this is fundamentally what we need to be doing. So um Greta thunberg always says it shouldn't be about net zero, it should be about absolutely zero and we should be looking to reduce absolute emissions. Um So I think it very much depends on the pricing the covenant package, what else that integrated um oil and gas company is doing in terms of whether that's something that we would invest in or not. Okay. And how how are you thinking about things like sustainable and particularly government bonds. Can you get to a stage where their their whole countries that could be good or bad? I mean I mean you can we're doing a lot of work on the sort of the sovereign E. S. G. Rating and ability. Some of the data is slightly behind where we are in the corporate sector and you consider that corporate is obviously behind where we are from sort of an active perspective but we're moving in that direction. I think for us the key for us is the leveling up of sort of fundamentals and the analysis whether its sovereign or corporate applying, then the relative value argument is where you want to own the asset or not. And then thirdly, ensuring that the E. S. G. Or sustainable component is not more but certainly not less important. So if you start to equalize those three elements, then you can start to make active decisions as to whether the company or the green bonds issued by the company is relevant. You got to think about those three key pillars. It's not that saying the S. G. Or the greenness is way more important or not. And it's not just about saying value is the only driver of driving factor. If you start to think about the fundamentals, the value and then the csg component, then you can start to make active investment decisions. And when you're looking at some of the corporate, how far do you model them? I mean at this point about potentially ending up with stranded assets? Are their companies now that you look at and think it's a factor, but actually it's a bigger light on the dashboard. I mean five years clearly, clearly the time horizon, I mean as bond investors, I would argue we've always had a reasonably long term horizon but also a very big eye on the sort of the maturity of the asset, whether it be a short term or super long dated assets and I'm sure we've all owned some 100 year bond in our time knowing that we wouldn't be around for maturity. But knowing that you've got a very long dated assets. The implication that brings. So I think, I think from our perspective is again coming back to the combination of the fundamentals of the price and the, the s genius. Okay, uh, what are your thoughts on UK government's about to bring out green gilts, isn't it? And, uh, what's what's your take on those? Yeah, 21st of September we're expecting the issuance of about eight billion of 2033, I think is in Greenville. We've been we've been lobbying the government for the demo by a demo meetings for What, 15 years? I remember going there to Whitehall and and quipping that the government's green credentials were based on the fact that they hadn't changed lightbulbs in the meeting when they were in, which caused a bit of consternation. And after very parliamentary tops title giggling from from the from the government members that were there. But yeah, so we're really pleased. You know, we've we've been working with the Green Gilts Committee for the I A. Was signed by the fred needle as well as really championed this. Um, and you know, the use of proceeds that we're looking at a pretty strong, they're going to go slightly beyond where they we expected and talk about the social impact as well, which is, which is good to see. We'll be quite hard to to make sure that they didn't put nuclear in there. Um, so there's an ethical credential because in the government's 10 point green plan, they mentioned small nuclear power stations around the country, which, which frankly, thing go wrong, pretty disastrous. Um, so yes, they're good and they're going to build and they're gonna build a green curve. It's gonna be another guilt this conversation in october, I'm not sure the maturity yet, but probably another seven billion of sterling issuance there. Uh, hopefully that would accelerate the move towards more carbon neutrality for the UK. Um, you know, we're a bit behind it. Your countries like Fiji Poland Nigeria issuing green Egypt issuing Green Day already. Um, so they're a little bit later to the party and we expected, but it's great that they are okay. I want to come back on something you were saying earlier, we were talking about how a lot of these technology companies much greener, you know, we can, we can all connect up without having to get in the car. But the flip side is all this technology uses power. Um, I suppose the most obvious example recently was sort of Bitcoin, which depending on what you read on the internet is using about as much power as metropolitan London Argentina or Holland in a year. Um, you know, the zoom uses power Microsoft uses power. Um, if you start to think about it through that lens, There's a lot of technology suddenly not look very sustainable either. So it depends where the power comes from. And um so there are companies that we have been looking actually us based companies that we have been looking at where they were early signatories to science based targets. So they're absolutely sort of fundamentally thinking. I mean I always think a company that's bothered to, you know, go through the paperwork of signing up to a science based target is probably thinking about climate change quite strategically. Um and again, really looking at how they can provide the power for the data services that they have in the kind of most efficient. And when I say efficient, I don't mean cost efficient, but I mean, you know, from a climate perspective efficient fashion. So I think as ever with credit, it's not being sort of blanket sector, You know, everybody in this sector is doing it, it boils down to the individual credits and the individual names. Um and how, you know where your sourcing that power from and what kind of technology are doing. Um I agree with your Bitcoin is slightly worrying, isn't it? Um you know, all these Children who are using their laptops to kind of power up Bitcoin and consuming all their parents utility bills. Yes. Yeah. Well let's let's move on to that fingers crossed to check when I get home what everyone's been doing. Just one final question, We're almost out of time, but we've been talking a lot about covid recovery play some of sustainable, there's also that great chunk of growth companies out there nick that have been doing incredibly well in the last couple of years, particularly textbooks. Just how do you think about them as potential investments? Not least because we've seen china doing a lot of cracking down on technology and they might be doing for different reasons but we're starting to see regulatory authorities in the States and the Eu looking at that Um in a world that's moving so fast, something it could be huge today might not be around in 56 years time. How do you factor all of that in if you're thinking about lending some of these players money? So I think taking the tech sector as a whole. Clearly I think we'll probably move to a world of greater regulation and silly china have gone fairly early and fairly aggressive on that and we'll see how far that gets traction, the kind of disruption that causes. I think the other thing I would go contrary to what I said earlier about some of the covid names when we're talking technology and investments. From a credit perspective there we quite like the high yield stuff some of the U. S. High yield names. Some of the software integration type names where we think there's much better opportunities than there is in some of the classic, very large cap mega cap investment grade. I think some of those you know very well known names. Apple netflix, et cetera. I think it's super long dated, super low yielding. Um, I would argue more downside than upside from a bond investor perspective because I just think these companies are so so well priced. I think that's a that's a that's not a great area of investment for us. But let's say taking the technology sector as a whole. You have to for us look down into U. S. High yield and some of the less known software type companies we think is good opportunities. Thank you. We are pretty much out of time. So I want to finish by getting a final thought from everyone on the panel talked to a huge amount today. So if there was one key message, you'd want to leave us with either potential opportunity, potential threat, what would that be? Um, can I come to you on that first bridge? Oh yeah, sure. Not everything what you think is, is always what it seems is what I'm gonna say. You know, you know, every crisis we've ever had, there's always been different. It's a housing US housing crisis, Covid LTCM. So don't think because Covid was here, that's going to be the next crime. There'll be something else which we don't know. And it's not always what we've seen. I never think about renewables and stuff, which kind of just wanted to touch on quickly. Is that again, not everything is what it seems. So hydrogen for example, you need energy to use it too to break their hygiene out water. Now, you can either do that through growing energy or you can do it through blue energy. So using gas, which actually emits more emissions than than what you would save. And everything about batteries, batteries are not necessary, that the solution is not enough rare air from the planet. We can't recycle batteries properly in terms of vehicle batteries at the moment. So despite the fact that we are pushing down certain avenues, the last thing is hydrogen, as far as I'm aware, there's only just like WMDS, there's only one government report that they've ever produced that it's not environmentally damaging to put water vapor in the atmosphere. I'm not scientists, but my geography person and I suspect if you still more water vapor in the air, it's gonna have a different impact and we don't know what the impact is. So there you go. Thank you brian um Rachel. Final thought from you. So I think final thought for me is think about what your portfolios are doing for you. Um, and think about when we're thinking about bonds and we talked about, you know, is there still value in bonds and how we've been and it's amazing, you know, bond rally for the last 20 years, think about what purpose they serve and also the outcomes that you're actually trying to get from your overall portfolio and think about, you know, whether it's climate, whether it's something around social, whether it's something more broadly about environmental, are your fixed income portfolios actually addressing that for you or not? Thank you. Nick, I guess probably following on from that, be wary of duration because it's expensive, but don't dismiss it because there is no other safe haven asset than guilt, Treasury et cetera in the world. And if you ignore those assets and end up in credit or high yield, you end up with an equity like portfolio. So I still think you can get attractive risk adjusted returns in fixed income, you need to combine some duration with some credit and high yield and I think ultimately if you use that as a sort of counterbalance to your non fixed income component, you can deliver attractive risk adjusted returns. We have to leave it there, thank you so much for watching. Do stay with us, we've got a little bit of information coming up in a second on how you can potentially use this as part of your structure. It just remains for me to thank our fantastic panelists here in the studio Rachel Harris and nick Hayes and down the line, bring jobs from all of us here, thank you for watching and good bye for now. Mm Okay, yeah, mm mhm, mhm, mhm mhm mhm, mhm

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