Investors look to active managers to outperform an index. However, ESG solutions that reduce carbon exposure often call for excluding large sectors of the index which can come at a performance cost and/or additional tracking error.
This is particularly pertinent to Australian superannuation funds that are subject to the ‘Your Future Your Super’ performance test administered by APRA.
Any solution that excludes material sectors such as Energy or Utilities is going to result in a different return profile compared to the index, as well as a smaller investible universe.
In partnership with Blackstone, this webinar explored how investors can employ a systematic fixed income approach to decarbonisation while optimising for alpha.
Transcript (with timings)
2.41 – The difference between systematic credit, quant and factor-based strategies.
4:29 – Factors aren’t necessarily evident in corporate credit.
6:16 – Do credit markets get it right when it comes to dispersion? How does it differ from equities?
7:21 – Some bonds don’t trade. They don’t have closing prices, so managing around that is a real challenge.
9:00 – Active managers have struggled to beat their benchmark. Looking past traditional active is an opportunity at the moment.
12:10 – Deciding on an index and looking at default risk and liquidity forms a good basis for assessing positions.
15:48 – What effect would a rate rise have?
16:50 – Some market environments could prove difficult for this type of strategy.
20:11 – How can you incorporate low carbon targets into the process?
21:07 – Energy has been one of the highest performing sectors over the last 12-18 months. Excluding energy doesn’t automatically lower carbon.
27:19 – Alpha is the number one goal across the systematic process.
31:44 – Sector and industry spreads are important.
33:47 – Can this process be adapted to meet Your Future, Your Super (YFYS) needs?
35:40 – Is there a risk of crowding out?
36:35 – Corporate credit markets have roughly doubled in the last 10 years.
Presenter:
Tim Kasta, Senior Managing Director & Co-Head of Blackstone Credit’s Systematic Strategies
Moderator:
Teik H. Tan. Executive Director, Investment Innovation Institute [i3]