Our newest investment team is our Unconstrained Global Credit Team based in Louisville, Kentucky. In order to provide some insights into the process and ESG approach, we have included a Q&A discussion with the Head of the team, Stephen Johnson. From next year, the report will include a dedicated profile on this team.

Please tell us about the history of the team
Most members have worked together for over 20 years. We have operated the same basic investment process, inspired by a durable investment philosophy, at two prior firms. Our shared history includes the leadership of two large fixed income managers, offering a wide range of investment products, managing a range of retail and institutional offerings, tailored to an extensive range of clients, across the globe.

Working together, we have successfully developed a process, including supporting investment systems, which serve as the basis for collaborative portfolio management for two large global investment management firms and their clients.

We are client-led, striving to align with our clients at all times, providing them with innovative solutions, as opposed to being product-led. This stewardship mind-set binds our team and underpins how we have evolved and grown over the years.

Please tell us about the investment process and philosophy
Perhaps the team's most important accomplishment has been the design of a unique investment process. Our process includes some core principles and features which allow us to achieve sustainable long-term investment outcomes for clients. These include:
  • Breaking down the portfolio manager role into a series of smaller, manageable and measurable tasks and in doing so, removing key person risk in addition to isolating and attributing outcomes to the various contributions to the product.
  • Our process also defines and treats the management of investment risks as everyone's responsibility. As fund failures are most commonly associated with the failures of risk management and control, this approach makes the risk management process more transparent and elevates its status across the team.
  • We have developed an investment opinions database and workflow system called ION to support this approach.
  • ION also systematises our research and investment view elements of our process, which are the building blocks for any portfolio we manage. The system captures and measures research and formalises its linkage to our portfolios. This naturally elevates the importance of our research, and creates a process for reflection and improvement.
ESG factors have long been used in equity and direct investments to add value, with strong evidence to that effect. Why do you think it has been more difficult for fixed income investors?
When we think of ESG in our investment process, we tend to think of investing in companies that build sustainable products or related services. Green funds, i.e. funds that make private and public equity investments in environmentally friendly products, are perhaps the most well-known examples in the US.

We invest in public bonds. The universe of potential investments for public bond funds is the public debt of large companies, debt of sovereigns, and debt issued by government related or sponsored entities such as Fannie Mae or Freddie Mac. Virtually all of these entities create products or provide services that are not explicitly focused on sustainability factors.

In our process, we view the comparison of ESG policies and the practices of bond issuers as a risk management exercise, making the ESG risk-assessment an integral part of our security selection process. Provided that the ESG analysis is future-focused, the benefits to investors will show up over time.
How have you overcome some of these challenges when establishing your investment process?
We have accepted this reality, with the plan to reshape it over time. Our research process requires ESG factors for the issuers we follow, so for now, we have a method for registering our ESG assessments and considering these assessments as part of our portfolio management process. Over time, we will be able to demonstrate the effectiveness of these assessments and the impact and relationship of ESG practices to bond returns and default risk.
You have a global database called ION which allows teams across our fixed income capabilities to share information and ideas. How important is this system to fully integrate ESG factors into your investment process?
ION will help us integrate ESG factors on a number of levels. To start, ION will help register ESG assessments for the issuers we follow. It will also help us measure our ESG ratings and understand how ESG assessments influence returns. It will help in designing ESG 'sensitive' products and help to control that these products are managed according to the fund's design.

Finally, ION will help improve collaboration and demonstrate how our process works, including how we use ESG to manage risk, build products and refine our views. ION will be central to our ESG capabilities.
Over the last couple years there seems to have been a real shift with large US managers and pension funds adopting responsible investment practices. How do you see this developing from here?
The shift toward responsible investing has been fairly dramatic over the past five years and we would expect this trend to continue. The team in Louisville designed and operated an ESG 'sensitive' absolute return bond product at our prior employer and, at the time, the product received a surprisingly cool reception. At that time, many of the large asset owners were only concerned with return and they saw ESG as something more likely to constrain opportunity, therefore potentially undermining returns. This view has proven to be short-sighted, but still has some advocates.

What changed? A number of things changed and contributed to the growth in interest. First, a number of high profile asset owners publicly declared their allegiance to RI and ESG principles. This coincided with consultants changing their practices, adding ESG-related consulting services to the other services they provide. Perhaps the most important reason was, and continues to be, a number of high profile corporate events and collapses, most of which should be identified as ESG-related problems. Examples include BP, Tesco and Volkswagen. These high profile failures remain the best advertising for an ESG integrated investment process.