With extensive experience working with UK pension funds and insurers, and having gained a deep understanding of their investment challenges, MFS Investment Management (MFS) has added to its global fixed income capabilities by launching a UK buy and maintain credit strategy.
The strategy aims to achieve long-term returns through low turnover and the sustainable capture of credit risk premium.
Kelly Tran, head of UK and Ireland institutional sales, says: “We have seen the increased demand for buy and maintain portfolios from UK DB schemes and insurance companies. Generally, these strategies are used as a component in one of two distinct investment approaches, the first aimed at self-sufficiency on the part of schemes working towards buy-in or buy-out, the second an approach in which insurance firms manage the assets’ post–risk transfer transactions.
“In a period of low yields and high uncertainty, the strategy has three advantages. First, it has the potential to deliver investors more certainty on returns, which may offer considerable comfort in the current changing inflationary environment. Second, while offering similar returns as a broader universe of bonds, the strategy aims to mitigate the downgrade and default experience in the portfolio. Third, lower turnover means trading costs will be lower and the savings can be passed on to the client directly.”
While buy and maintain strategies have been available in the United Kingdom for a number of years, there can be a marked difference in how managers deliver on the approach.
Owen Murfin, institutional portfolio manager, says: “One thing that has surprised me is the varying levels of diversification among different managers. Diversification is key to risk management and portfolio construction, but nowhere is this more important than in buy and maintain portfolios. Yield optimisation is a significant consideration, but it should never come at the expense of prudent diversification across a range of factors.
“We begin by defining the client’s portfolio objectives and constraints. Then we employ quantitative models that limit our exposure to country, sector, name and ESG risks to avoid too much exposure to areas like energy and cyclical risk. For example, our names can make up only so much of a sector and be only so heavily weighted. As well as helping to optimise the portfolio, we think this makes it more diversified and is the prudent course,” he concludes.
Important investment trends can be reflected in a buy and maintain strategy, including the growth of environmental, social and governance (ESG) investing, including a growing focus on carbon neutrality.
This is particularly relevant given that new climate change governance and disclosure requirements contained within the Pension Schemes Act 2021 came into force in October this year. Many asset owners in the UK have made their climate pledge, and MFS has published its own climate manifesto and joined the Net Zero Asset Managers Initiative.
Tran says: “Buy and maintain strategies tend to be built to meet the bespoke requirements of each scheme or insurance firm. As part of building client portfolios, ESG factors are assessed in the context of overall credit risk in the analysis process. Clients are able to include or exclude ESG preferences and have the opportunity to engage with companies to influence change over the long term. We are committed to helping them on their sustainable investing journey while staying true to our philosophy of creating value responsibly.”
The strategy is run by a team of four portfolio managers (see below). The firm has managed fixed income portfolios for more than 50 years, and all the firm’s equity, fixed income and multi-asset funds are supported by our global research platform, through which MFS oversees USD684.3 billion in assets under management, of which USD82 billion is fixed income, as of 31 October 2021.
MFS is keen to meet each client’s individual requirements and to provide as much certainty about future returns as possible, so we have made the strategy available to UK institutional investors via a bespoke segregated account.
