Speaker 0:
with interest rates and inflation at elevated levels, is now the time to focus on active fixed income management in DC pensions to discuss that I'm joined here in the studio by Paul Skinner. He is investment director at Wellington by Paul Buxley. CIO at Smart Pension and Ted Patel, Principal UK DC and Financial Wellness at Mercer in our Palace. Let's get things straight underway.

Speaker 0:
Paul is part of the asset management team at Wellington. Could you start by just giving us a little bit of an overview of where fixed income markets are today? Full stop.

Speaker 1:
But today, I think they're probably the most interesting they've been for the last 10 years. Yeah, I mean, for since the financial crisis, because inflation was low, central banks kept interest rates pretty close to zero. And so you you weren't getting much yield on your fixed income

Speaker 1:
since that horrible bear market of last year. We recoup on the whole of the fixed income universe. We're now getting yields that really make a lot of sense long term for DC investors. So it's phenomenally interesting and, you know, one of the the the things that's come out of this rise in inflation that we're combating is the fact that central banks have got to be more proactive. Now we're going to get more in terms of cyclicality.

Speaker 1:
That means we need to be actively investing in those areas. So it's a very interesting time. OK, thank

Speaker 0:
given that we've had a year where fixed income went down or 2022 fixed income went down and equities went down. What sort of knock on effects has that had sort of challenges? Has that had for DC Pensions? Uh, yeah, it's been a very challenging time. I think, Uh, the, uh

Speaker 0:
uh, both asset classes performing badly, uh, has had some impact for people close to retirement, I think for people who are a little bit further away,

Speaker 0:
let's remember saving into a DC pot is a long term, long term issue.

Speaker 0:
At smart. We we we've had an 80 20 split in our portfolio and the growth side, I think, helped. And I think on the the non equity part of that we had a bit of private markets in there, which I think has given us some protection. So actually we think we fed relatively well compared to a number of, uh DC funds during 2022.

Speaker 0:
But of course, what it did really is refocus our efforts on making sure that we communicate to DC savers that it's a long term investment, that they shouldn't be panicked by short term drops in value, and that over the long term we still have confidence that our growth strategy will give decent returns. And when you're out and about

Speaker 0:
talking with clients about DC, what are some of the things they're saying to you about fixed income at the moment? What are some of their thoughts and expectations? What? What are you saying that yeah, echo what Paul said. It's a very interesting time. Um, it's probably two real themes that have come up, Um, on the back of 2022.

Speaker 0:
The first one is the speed of the of the falls. You know, markets go markets go down. But the speed was was a big surprise, I would say for most of our clients and then the question around that is OK, so our bonds really as safe as we portray them to be, Um, are they more risky now? How should we filtering that into a strategy. So we were looking at client looking at revisiting the role of fixed income, Um, where they're deployed, how they're deployed. Um,

Speaker 0:
the biggest pain point probably would have been, as you'd expect at the point of retirement for a number of members. There are protections against that. But revisiting that strategic role that bonds do play, uh, and the types of fixed we have access to the key themes we're talking to clients about at the moment.

Speaker 0:
So could you put put a bit more meat on those bones? So what are what are some of the things that you look at in fixed income now that you wouldn't have before? What are some of the roles that fixed income could play? We look at a broad range, of course. You know, there's various facets of fixed income market differences across ratings across the types of bonds that are issued. Um,

Speaker 0:
the challenge we have, particularly on the consulting side. There's a bit of a bit bit around cost, of course, because the cheap beat has been very, very well rewarded over the last 10 years. I think that paradigm has shifted very quickly to the point where we've seen you to rise. Probably more opportunities in the broader space. So a broader range of fixed income was what What we're thinking about in a bit more detail and how that's deployed actually is, is probably the hottest topic, because perhaps a passive approach to all of it may not be the best simplest thing to do.

Speaker 0:
They well, Paul Skinner, you mentioned the importance of being active at the moment. Um,

Speaker 0:
why is that so important right now?

Speaker 1:
Well, I think if we enter this phase where Central Banks are responding to this higher inflation level and you know, we all know why inflation is higher now for some very good secular reasons, demographics in developed countries have moved along. And every time we get a, uh, economic growth, we're going to bump into wage costs, and that's

Speaker 1:
to keep inflation. We've also got de globalisation. You know, that's been going on literally since 2009, where global trade has been shrinking and couple that with geopolitical issues. And you've got supply lines shortening up people wanting to onshore. That's all quite inflationary. So in an environment where we've got inflation and central banks are having to be proactive against that rather than you know, keep rates low.

Speaker 1:
You're going to get cycles that look a lot more like the 19 sixties through to the 19 nineties, where you know you got periods of high growth and inflation, and then you fade to, uh, much lower growth and lower inflation. But in that environment, you get dispersion and you get very different regional behaviour, very different country behaviour and, most importantly,

Speaker 1:
individual companies and stocks will behave very differently now. We haven't had much dispersion for 10 and 15 years, but now you're entering a phase where it's absolutely vital. You avoid the pitfalls, and we've seen already some of those appear

Speaker 1:
and you can take advantage of some of the opportunities. So being able to actively manage in this environment that's slightly more cyclical and slightly more disperse is gonna be really important. And

Speaker 0:
what would you say is the difference between active management and trading if in a in a world where things are moving around the whole time, yeah,

Speaker 1:
traders sit there and they're they're churning positions on a daily basis and minute by minute,

Speaker 1:
active management is about taking a 3 to 6 month view, maybe a year view on where is the actual economic environment going? Where is that going to create opportunity? And most importantly, where is that going to show up? Weaknesses. And, you know, there's lots of examples we've had recently specifically the US banking system, where those weaknesses from having

Speaker 1:
liquidity so plentiful for so long are beginning to show up. So, yeah, it's it's absolutely vital that active management is a is a slightly longer term thing to take advantage of. Uh, you know, annual six monthly moves in in economies. Thank you.

Speaker 0:
Can you tell us a little bit about what the options are that you've got for for fixed income in smart? Because I think you've got a You've got a few index based, uh, options in there.

Speaker 0:
Just just get a bit of a sense of that. Yeah, and I'm very, very happy to do that. I think it probably starts for us that we made a commitment to, um, be fully e s g integrated in terms of our growth fund.

Speaker 0:
And as I said, we had a we had an 80 20 asset allocation, so that's 80% equities and 20% in in fixed income. So it's it's 10% into green bonds, and it's 10% into a private markets. Um, a private credit, uh, mandate.

Speaker 0:
And

Speaker 0:
the the Green Bonds Fund is an article nine fund. The, uh, the Private credit fund is an article eight fund. So across the piece, we we've got 100% e s u integration. We've got a very ambitious 2040 target and actually building on Paul's point around a active management. Largely if we look at trying to get to to to net zero and investing in the carbon transition, renewable energy, whatever that might be,

Speaker 0:
you can't really You can't really do that properly. We think by by doing that on a passive way. Yes, there are some e s g tilted indices, but I think when you're trying to, um, lend money or or buy equity in companies that are gonna help you decarbonise your portfolio, then I think that active piece comes in. I think it also helps in the current environment that,

Speaker 0:
uh, if there's, you know, I hesitate to say that if there's there's one good thing that's kind of come out of the Ukraine war. It's been this kind of refocusing of of energy, uh, and moving away from fossil fuels to to more innovative, uh, technologies. And again, if you're able to fund those through through credit or or or equity, then I think, uh, I think that's you know, that that that's pretty punchy. Um, as I say 80 20

Speaker 0:
we we constantly look at the asset allocation. I think there is a risk, as ever when you have a big blow up that you use hindsight as a reason to change things. I mean, sometimes you do have to change things for us. I think we came to the conclusion that our strategy seems to be working pretty well. So the the the investment returns held up quite well. We have reduced carbon by over 50% since 2019, and you think of Paris it's

Speaker 0:
reduce emissions by 45% by 2030. So we are We are very actively using our investment decision making in equities, but also in fixed income to to to to to really move that to carbonation along. Thank you. I'd like to move the conversation on to E. S G and sustainability in a bit more detail in a moment. But just on this active versus passive point fixed, get your thoughts around the role of,

Speaker 0:
um, passive in the future because I think you've got a couple of passive fund options in the Mercer Master trusts. So is it important to offer a choice? Or do you think that choice? I think there's always There's always various factors at play and and see where Paul is coming from there in terms of the state of the market, the opportunities available and the importers of being active. Um, looking at this with the client lenses and the member lenses, there's two parts of this cost is not the be all and end all. But there is an important part to play for that to play. So

Speaker 0:
we'd love to have more, perhaps more active in the portfolio. Um, it's got to come at the right price, and ultimately it's got to deliver. Um, the investment part is really important, but the emphasis value never goes away. Um, when our clients are looking at value, it's not just all about costs, but when you have active portfolios in play, they have to persistently deliver. And that's a big challenge because I appreciate the investment is a long term, long term game and looking at sort of sustainability performance.

Speaker 0:
Um, fiduciaries tend to be under more pressure on a short term basis. So there's a balance there between the investment purity of it all, but also what what fiduciaries have on their plate to to deal with. So if Paul Skinner came to you and said, you know, now's the time for active management and he laid out his case, as he has done with us today, um, and also sort of wove in that element that to hit Paris, you know, climate targets you need to be active. You can't just be giving people money on lending people money on the basis they're in an index.

Speaker 0:
Um, how would you go about assessing whether his proposition offered value for money? Because active management does cost more? It does cost more. It does cost more, but I think there's two parts to this as well. It was, What are you getting for that you're getting access to skill experience, I suspect and, um, knowledge of the the various facets because, you know, we talk about when you talk active to me, I feel a broader, broader suite of bond opportunities. You know, you can focus it on

Speaker 0:
guilt per se or or credit, but actually, I think things like multi asset credit a broad portfolio is lends itself to to better chances of success. Um, I will say from an accessibility perspective, and this is something I'll probably challenge it just on that isn't that it's not a It's not an argument for asset allocation or active stocks within the mandate within with the asset allocation. Absolutely. Because I think bonds and multi asset credit do have a party in DC portfolios and got a strong advocate of that have

Speaker 0:
deployed, actually is the key is the key to this and what active gets you and the two parts I was getting towards is a stock selection part. But it links together what Paul Boxy said around the engagement piece, and I know you're going to come on to sustainability. But what are you getting for that active management? More than just beyond the returns, returns can speak for themselves. But the active engagement, the policy decisions around that are probably as critical when you're looking at value because they are the softer things that you can't simply measure by numbers.

Speaker 0:
But if sorry And this this is my This is part of my segue across E S G. But just one final thought of this back. So if you're looking at value for money as a proposition and somebody had the fund and and it did sustain sustainability, however you define it, um, they delivered on those sustainability goals, but they turned your 100 your client's £100 into, I don't know, 100 and three quid, and and the peer group over whatever time period you're looking at had turned them into

Speaker 0:
£104. So slight underperformance in in, in terms of of investment returns but ticking all the boxes on the other thing Would that be a value for money proposition for you? Or you have to take these things in the round? So you know, the numbers, the numbers of the numbers, and they're easy to interpret. I think our job as consort is putting that into into the broader picture. And I think the conversation now is moving away simply from

Speaker 0:
one number is higher than the other. Therefore, we must be better. It's looking at the numbers, one part of it looking at the at the context. And the other part, I think, importantly, how that's communicated and assesses the package is where the value comes in. So it's not as simple as saying one Oh, four is better than one. Oh three is 103 plus better than 104 plus or minus y and Y is not a not a number. So therefore, you've got to think about it from a more discussion perspective. Thank you.

Speaker 0:
Well, what are what are your thoughts on that? And if it goes beyond numbers, isn't this danger? It becomes a softest dream. You you might have the best product, but these clever people and your competitors on the short list of sort of

Speaker 1:
let's pick up on both what Paul said and what Ted said. So on this concept of engagement, you know, it really is important that whoever is the holder of the capital is not just investing it, and we want to make that financial return, and, you know that is our primary, uh, ambition is to make a financial return. But if you can get the holders of those capital to actually engage with the people they're giving it to or lending it to

Speaker 1:
and, uh, drive the agenda of the way they're moving in terms of sustainability or, uh, you know, their E s G profile. That's a really valuable part of the proposition. Because, you know, as, um, a a scheme member, you feel that you're actually using your capital. Your pension fund is not just making you money, but you're also

Speaker 1:
affecting the future and and doing that, hopefully in a positive way. So I think there's two things as one. This concept of engagement absolutely vital for getting people to understand their investments are not just financial, which we want them to be and and they will be. But they're also a use of capital that is pushing the agenda forward.

Speaker 1:
And then, as Ted said, you know, the the the whole thing of what do we offer as an active proposition? Well, it's not just being able to move and to adapt to market uh, environments, which is absolutely crucial, as I said at the moment.

Speaker 1:
But it's also the ability to report and to collect the data of when we engage. And, you know, when we look at the impact side of, uh, of investing, which is where we actually have a mandate to have a positive, uh, effect with that capital.

Speaker 1:
We have key performance indicators where we will track how a company or an issuer does in terms of its positive impact. And we will give those numbers those measurements as part of report. So suddenly you're reporting on a financial return. Yeah,

Speaker 1:
and you're then reporting on what has that capital done to improve social and environmental quality, And that's really powerful in being able to talk to your scheme members relate to them and make them feel good. So the act

Speaker 1:
of management doesn't just come with financial performance. It comes with this reporting this engagement, which is really important.

Speaker 0:
But when those numbers come out, the the the the pure performance numbers of was the fund up, down. I mean, those numbers will be audited. All sorts of third parties involved.

Speaker 0:
I was gonna say Micropal, but I think I'm showing my age there. Um, but in terms of of the impact ones who who collates those, is it A. Is it an independent third party.

Speaker 1:
We all, um, you know, enter our performance into, uh, a thing called It's a it's a, you know, third party that that does all this up. So we know the financial performance. And, you know, as I said primarily

Speaker 1:
as an active investment manager at Wellington, we, you know, want to make that financial performance. But the secondary thing is then measuring that, uh, the you know, what we're doing with engagements that, actually at the moment comes directly from us. But there are some great industry, um,

Speaker 1:
efforts being made to pull asset managers together. In measuring that impact, there's one called impact measurement project. I MP We work with them a lot of asset managers do to get a common standard for manuring what we're doing in terms of the

Speaker 0:
impact. Thank you, Paul Bar. When you putting together, is there ever

Speaker 0:
in the back of your mind? I thought it could be a danger that you you get pulled so far down the way the world people would like the world to look. Or they think it should look that actually, it starts to have a negative impact on investment return on returns? Um, I No, I don't think so. I mean, I think when we think about the way the world needs to to move, um,

Speaker 0:
you know, we think that investing in in a sustainable, responsible and impactful way is going to lead to better returns. But of course, we will continue to monitor to see whether that actually happens. We're a trust, Uh, So our trustees have that fiduciary responsibility, as you've as you've pointed out. So with everything to do with investment, that is their number one. They're there to generate decent returns and of, you know, get great value for money for members. I think

Speaker 0:
there is a debate as to you know, how much risk should you be taking, uh, in a default? Um, uh, when you consider that vast numbers of, uh, of, of of UK residents do not put enough really into their pensions. So for us, it's more about looking at the asset allocation and within that, making sure that we're investing in a sustainable way. We do regularly get feedback from our members to sort of say, you know, what are your views on this one? Because we didn't want to be,

Speaker 0:
um, you know, disconnected from our membership base. And so we'd run regular sort of surveys with them. And as you might expect, we got a bit of a mixed bag response. So for some of our members, this is really, really important. And actually, for some of them, they are prepared to pay a bit extra, uh, for, um, uh, you know, for a growth fund that would have more impact, which is interesting coming back to Ted's point cost. You're never far away from cost in DC.

Speaker 0:
Uh, I have very interesting articles. Uh, last couple of days, uh, from F t uh, in in particular talking about how the UK has the lowest fees, Uh, in I think in the developed world, certainly much lower than Australia and and and the US. That has definitely driven behaviour.

Speaker 0:
But as I said in my opening remarks, you can't actually get to a sort of safer, cleaner world with pure passive. So you have to find budget for active. You need to work managers pretty hard on on fees to see if you can get some good, get some good deals.

Speaker 0:
But but but coming back to to to your point. Now, I think we are confident that by investing in a very disciplined way into funds that are very well run with great data, uh, we we should be, uh, not having that conversation about Well, it didn't perform as well as this one,

Speaker 0:
Josh. How do how do you go about establishing whether the fund manager is having an active fund manager is having this influence and sustainability because if, for example,

Speaker 0:
not saying it, But

Speaker 0:
Paul was only in short doing short dated investments, you know, a couple of years, I mean, I would guess for most people to to, you know, if you think about climate change over two years, it's weather. But if you're lending the money for 40 years, that's a climate issue. So,

Speaker 0:
uh, and then once they've hold the paper, you'd be wanting them to hold it for the long term, not trade in and out of it every six months. So how how do you What are some of the things that you would look at in the portfolio? Uh, duration of the portfolio, how long people hold those investments? Yes, There's a number of factors here, but I think this. The overall point on this is that it's it's It's an ongoing ongoing fee, so short term, medium long term,

Speaker 0:
we're looking at active management. Duration is quite important, but actually there'll be tactical plays during those as the market changes and you twist as such, um, when it comes to the sustainability elements of this, um, voting records are very important tracks records of engagement, and we're seeing a lot of more transparency from all managers of all asset classes. But there's an increasing emphasis, I think, on bond managers where it probably wasn't the norm. Um, equity equity allocations can be voting rights. Bond managers is slightly different, but

Speaker 0:
very much transparency around how they're engaging with that with the people are lending towards how they're shaping their behaviour, how that builds into sustained business plans. Ultimately, what does that mean for the cost of their paper? Because

Speaker 0:
managers don't do this just for the fun of it. They're looking to generate value from the investments they make, and there's a marketability point which all that feeds into, so the measurement of that is quite difficult, but actually the transparency on reporting and playing that back into your clients is the real value from a consultant perspective to show that not only manager taking this seriously this ongoing engagement with this is not just ticking the box point.

Speaker 0:
I just bring back Paul. The various points around cost on this, Um, there is discussion to be had. And, you know, I have fun conversation with asset managers quite a lot about what's what's a reasonable price point. And there isn't a simple answer. But I think there's a bit of leeway to be given that for this to be able to happen. And I think when clients see the value of this developing, as you would expect there there's lots of academia about integrating E S G into portfolios over the medium. To longer term should generate better outcomes for members.

Speaker 0:
If we can do that, then the prophecy is self fulfilling. We're a bit of an early stage to make sure we're We're a bit early to say whether that's going to happen at the moment. Um, but I'm very, very confident that that's the right thing to do. Echo your comments. It's it. We should be doing this.

Speaker 0:
OK? Yeah. I was just gonna say, I think The other thing, um, you know it It was a very unusual year in terms of the, you know, correlation with bonds and equities. I mean, it has happened before, but it doesn't happen very often. You know, the the the the the energy sort of crisis, Um meant that actually, you can find all sorts of examples where if you'd not invested in a sustainable way if you'd continue to hold

Speaker 0:
old indices or, you know, um, you know, you didn't have that e s g sort of philtre as part of your active process, you'd have performed better in 2022. We see it all the time when we're sort of bringing new clients in, and we're looking at how they have been invested because they've not had the budget to do anything more. They actually lucked out a little bit last year with some of those returns, but But it was luck, really. And we don't think that was enough to sort of upset the theory that Ted has just sort of talked about which is again over the medium term,

Speaker 0:
you know, an E S G or a sustainably invested bond will outperform, Um, one that is not run up. We did

Speaker 1:
a lot of work on. Um, you know whether, uh, fossil fuels are really additive to a portfolio, and what we discovered is they're so cyclical and so volatile that actually they had enormous a lot of volatility to a portfolio with very little extra return. And so you get outliers, like last year when suddenly fossil fuel does well, but it will be compensated by a year when they do really terrible.

Speaker 1:
And as we move into alternative energy that you know is going to happen. So, you know, I I pick up your long term view on sustainable investing being a profitable thing. But also in the short term, you know that volatility, you probably don't need it in a portfolio. So, um, it's it's it's very interesting, but can I just say one thing on the, uh, on the weather? Uh, comment you made. Um, we spend a lot of time worrying about, uh, climate change, and not just the transition, which is clearly very important,

Speaker 1:
but also what's happening with physical climate change. We've got a, um a a AAA an arrangement with wood well institute in the States. They're the preeminent climate change, Um, institute, uh, in the world. And, you know, they've looked at the world in these sort of 50 kilometre squares to see how things are changing with chronic, um, effects of, you know, heat, drought, that sort of thing. And also some acute stuff, wildfires and flooding.

Speaker 1:
But what is happening is is not a long term thing. This is affecting the world, short term. And if you're looking at rainfall on the Iberian Peninsula and looking at a hydro, um, you know, company that's producing energy, they potentially are going to have more droughts in the next few years than they've had

Speaker 1:
for for the last 20 years. That affects their business right now. And, uh and so I I I I think you know, we we can say climate change. Would

Speaker 0:
you be prepared to invest in a company doing the right things in the wrong part of the world? It's got a great business, you know?

Speaker 0:
No, it's, uh, but but it's as you mentioned on the Iberian plane, and therefore it's got a lot of headwinds, as

Speaker 1:
what we need to do is assess the investment risks of that. And, um, you know, we we had a look at AAA Brazilian water company

Speaker 1:
and, um, you know, they had a lot of their water sourced from a particular part of Brazil that our climate change. Scientists were saying That's going to see a lot less rain in the next 5 to 10 years. But when we talked and this is the engagement thing, when we talked to that Brazilian water company,

Speaker 1:
they had already done that research. They'd already factored that into things. So we can get comfortable with that as an investment risk because we know they've incorporated those risks into their, you know, forecasts and things like that. So no, it's it's It's a lot about understanding, investment risk in a world that is changing and and, you know, I I nobody wants to forecast the weather, but there's a huge probability that we get a major El Nino effect coming globally by the end of this year,

Speaker 1:
and that's going to push up temperatures through the Paris Accord on average. And that may be a time when people wake up to the effects of climate change on the physical side.

Speaker 0:
OK, I wanted to we've got about 10 minutes or so left. So I wanted to move to We touched a little bit on the ex. We could understand a lot more on it, but I want to move on to to really big part of the index for bond funds, which is financials. Um,

Speaker 0:
can I get your thoughts there? Because I can remember. In the last years, everyone's always said after the global financial crisis, Well, wherever the next financial crisis comes from, it won't come from the banking sector. About the point that everybody agreed That was the consensus. S V b went under a couple of other little banks. Um, you've got, uh, Credit Suisse has been taken out of the equation.

Speaker 0:
Uh, and everyone started to say Goodness, they've lent an awful lot to real estate that hasn't really been revalued. And now everybody's working for what's gonna happen there. Um, how worried should we be about this sort of happened. I was reminding me of a quote. I think it was Bill Clinton's financial advisor. Economic advisor said if I was to be reincarnated, I'd come back as the bond market so I could so I could intimidate you all. It always makes me laugh to your point. You didn't think it was coming from the financials? Guess what? It's coming from the financials.

Speaker 0:
I think what's important, You know, reading a lot about the Credit Suisse fallout and and and s V b. And also looking back, you know, similar things and a ones in India as such

Speaker 0:
Really interesting. But they they still feel very anomalous to me. You know, on the back of that, the reaction, of course, is oh, are 81 safe? You know where they fit in the capital structure. We're not getting our capital back. We're a bond investor.

Speaker 0:
Should we just have just to be equity holders? Because they got they got compensated. The market reaction has been that this this feels like a bit of a blip. Um, in terms of the sort of protocol of things, you know, institutions in the UK and in the eurozone have come out and said that is not what we expect to happen as a norm. So I'm still fairly comfortable with the the kind of hierarchical structure of the bond place. I think the bigger picture is that it still reminds us that

Speaker 0:
Bob Bonds generally are due to be safer. Um, there are risks underlying of that which I would expect the likes of poor to be looking way beneath the surface. Covenant agreements, protocols, um, access to capital in those in those in those environments. So not without discipline, but very much. I think that there's a the role is still there to play, but perhaps understand those risks in a bit of detail is where the real active process can add significant value.

Speaker 0:
And everyone's trying to do the same thing I would suspect in active space. But they are. They are doing it differently, which lends to different outcomes when it comes to investors. And when it comes to advising your clients, it's that level of diligence that we would expect to go into from a research perspective to fully understand how that's gonna play out. Thank you.

Speaker 0:
What are your thoughts around that? Because I mean, in corporate bonds for land, financials are a big and also how you touch as well, because I know you. You do like you. You like the green stuff. Um, how much time do you spend looking through the loan books of banks and who they're lending to.

Speaker 1:
So, um, I I think the bank story is really a post a child for what's going to happen in this new environment. The cost of capital has risen,

Speaker 1:
and it's going to find out where that, you know, cheap liquidity has been used irresponsibly. And, you know, the examples of the banks that we've seen tended to be those that didn't have a good funding base. They were funded by uninsured deposits, I e you know, big lumpy, uh, deposits that could move really quickly away. Um, the vast majority of banks have a much,

Speaker 1:
uh, more widely spread funding base. So on one side, you've got these ones where you can spot the vulnerabilities and the problems and and avoid those

Speaker 1:
and the other side. You can actually look at banks that have really good characteristics who are going to be winners in this environment, and those are the ones you want to be investing in. You know, the big, well capitalised money centre banks that have been very well regulated over the last 10, 15 years and you know those are going to be winners. So it's a classic example of why that active management is going to be important. But on the on the green aspect, we've done a lot of work on,

Speaker 1:
um, Green issuance by European banks. That's been a very popular area this year. And you know, you have to be very strict about making sure that the capital is going to flow down into the green funding that, uh, they're saying, You have to make sure you've got a track to that. And then when you look at

Speaker 1:
the scope three, you know, carbon emissions for the banks. This is a hugely technical area, and you know, we're making advances there. It's by no means completely, you know, advanced to a state where we can really get finite numbers. But we can tell who are the ones that are behaving

Speaker 1:
better and the ones that are behaving worse. And that's our job to make sure that we talk to them and say, You know, we're not seeing the numbers we'd expect, or we're not seeing your lending standards at sufficiently high levels engage with them, and and as active investors, we can choose to invest or not.

Speaker 0:
So if you've got a bank that says we've issued a green bond, and you've You've backed it. Um, how much are you taking? What they tell you on trust. They provide a report. And how much do you sort of send a chap from Wellington round to the, you know,

Speaker 0:
some serious accountancy qualifications

Speaker 1:
happening. I mean, we will, you know, to a big bank. We'll be seeing them 56 times a year and finding out you know what's going on. What are what are they doing? How's the growth in that, uh, green funding gone? You know, tracking that that capital is is going to the right place.

Speaker 1:
I mean, we've had some fantastic conversations when sovereigns are investing, uh, green Bonds because many sovereigns will just say no. Hand us the capital, and we'll allocate it. Don't worry. Well, we've engaged with many of these, and and actually, the engagement because we're a big buyer of bonds has resulted in them employing an accountant

Speaker 1:
independent accountant enshrined in the, uh, the sort of, um, prospectus to actually track the capital and make sure it's going in the right place. So it's the green bond world is a murky one. You know, there's no real proper regulation there. And so we have to go.

Speaker 1:
Go in, investigate every single one and make sure the money is going in the right place. Thank you.

Speaker 0:
Now, we've got about five or six minutes left. There's a couple of other topics that I want to get on to. So, Paul Paul, um, alternative fixed income, Uh, an area that people are very keen on. Floating rate notes, all sorts. Um, what's your view on that? And where that can fit into a default fund at the moment, Or are you or was it was That was that sort of bull market froth.

Speaker 0:
Um, I think private markets, I think, are often talked about as being sort of things that we should absolutely look at. I think you've got to be clear on your on. Your strategy comes back to how much risk you want to take. You know, you're looking at sort of a diversification, but also,

Speaker 0:
uh, on any given, sort of, you know, moment in time, what is likely to give you a, you know, a decent level of return. We we found that a private credit strategy suited our our needs. You know, pretty well, so that's got liquidity built in. So it's it's it's through, uh, m v credit. So it's a sort of 60% private and 40% public. Uh, actually, I think we could probably do do more in the in the in the liquid space because we've got very strong cash flows coming in,

Speaker 0:
Um, so, in terms of being able to deploy, and we can get liquidity through the scheme rather than necessarily needing it within the fund, Um, but that private credit sleeve has a number of instruments in it. Um uh, a as does the the the public side, that sort of backs that. So going back to some of the things that Paul was saying, You know, you've got to be very, very clear about, you know,

Speaker 0:
the the geopolitical side of things. Um, you know, let's not forget that next year. I think there are so many countries having general elections, we'll probably have one. The US will have one. Uh, Ukraine, I think has got one there. There's there's a lot of geopolitical stuff in here that we need to be cognizant of. I think if the US goes back to a Trump administration. I think it would be

Speaker 0:
quite interesting for a number of reasons, but in terms of the investment markets, particularly E S G. And we've seen a little bit of evidence in the US of states trying to row back on some of these bits and pieces. But I think it's It's a mixture having the ability to invest in a mixture of instruments within, uh, a mandate that gives you the ability to, um,

Speaker 0:
be agile and look at markets and decide whether you know, you know, instrument A is better than instrument instrument B. And again it comes back to if you're an active, active manager and you're, uh, you know, well researched and and and and and uh, you know well, you have a lot of resource there. You can be pretty nimble, I think, in terms of of getting into the right areas and and avoiding the bad ones, and this is a point that came up in our first panel. But as as DC scales up,

Speaker 0:
um, you know, it's sort of fairly early in the growth path. What? What, what what are some of the things that you think you'll be able to do in fixed income with, for with clients that perhaps you can't do today because the industry is not big enough. Yes, I think the liquidity is key on this, and this would apply to any liquid asset class. You know, we're focusing on focusing on on more on multi assets or credit funds here. So I think there's there's an opportunity we had there. It's still got to earn its way into a portfolio much like any other asset class. But we have seen

Speaker 0:
across, you know, the strategies I monitor such taking advantage of opportunities at the moment, slightly increased allocations in defaults where they're sort of on a delegated basis, where we're seeing high yield, um, playing more prominent parts, playing um, E M DC, playing more prominent parts so that they can be done. The private conundrum is one that's not new. It's it's been around for a while. I think there a management of expectations here. It's really critical with clients because

Speaker 0:
we always say, you know, do we need daily liquidity in? I think we do, but we kind of have to have daily liquidity and daily pricing. But it's how that message is managed. Should the point be where you can't get all your money out all in one go whether you want to or not. A. A slightly different question, Probably we've seen it the most. The power I can take this is is property and a property has some some challenges and funds of suspended trading. But when there's an expectation that that can happen and that actually there's a contingency plan in place should you not need all your money out in one day to provide daily liquidity?

Speaker 0:
Clients have accepted that. So if we can manage that messaging and make that gap shorter, so it, almost to the point of zero, be by some bridging financing that would work. That would work really well for me. We're not there yet, but this is how you get for me liquids exposure more marketable and more accessible to sort of

Speaker 0:
multi asset strategies and defaults. Um, so we we're not there yet, but I can see it coming because the industry wants to play in this space, and there's going to be some gift to make that happen. Thank you. Now we've got through lots of material. There's loads more we could chat about. We have to bring it to a halt. So I want to get a final thought from each of you. Just a just a five second burster piece. So there's one thing

Speaker 0:
you want to leave us with. What would that be, Paul? Can I come to you first? I think it's just being very, very clear on what your members are telling you. And, you know, focus on the fact it's a long It's a long term investment. Thank you. Yeah, I pick your point on on on the E. G and integration. This is not a peripheral conversation anymore. It's fully integrated. And what we're talking to clients about what product providers talking to clients about what Massachusetts talking to clients about. That's really, really reassuring for me that the conversation is all in the right place, and it will continue in that way. It's not a side show anymore, thank you.

Speaker 1:
And I think, you know, we need to cater to the needs of the individuals who are investing. They care about their sustainability and you know the active management is important for their returns. And if we, as asset managers can provide that at the right cost. We're all winners.

Speaker 0:
We have to leave it there. Paul Skinner, Paul XY, Ted Patel. Thank you for joining us.