PI: How will fiscal and monetary policy effect the price of bonds and risk assets going forward? Cielinski: Monetary policy’s affect is now limited to the forward path of short-term rates because central banks can stay on hold forever, so it is up to the fiscal side to drive bond markets. At some point you start to price in rate hikes, but that is a long way off. For bond market driv- ers in the near term, I am looking at fiscal policy and if central banks keep testing the limits of how much they can borrow and spend before it pushes bond markets too high. When you do that it can be self-correcting as at some point bond yields will go too high and impact other risk assets. Keep in mind that it is not just about spending today but the fiscal cliff that gets created a year from now. One-off big expenditures become detractors. Everything feels great right now, but in a year it could be a different story. This spells more uncertainty and volatility on inflation, rates and policy.


PI: How do schemes select a bond fund manager? Pickering: As a trustee, I rely on the intermedi- ary. I need a consultant in whom I have confi- dence that they understand the market and what I require from that market. One of the advantages of being a professional trustee is that I do not necessarily need a household name, provided that the consultant can con- vince me that the fixed income manager is not only good but is appropriate. Hitchman: Credit selection skills are fundamental to everything. In credit, active management is the way to go because there is a lot of value that could be added from a proper credit assessment to mit- igate the default risk. Credit spreads have tightened, and asset prices generally have been pushed up because of QE, so the mar- gins have become thinner. That is an environment where a good credit manager can make a huge difference in delivering returns. Above and beyond that, a lot depends to some degree on the nature of the credit. In the private credit market, you need people with experience of structuring – and sometimes restructuring – as well as the contacts to originate deals. These assets are illiquid, so what access do they have to the market and how quickly can they execute? Trustees want to have confidence in a manager, but they also want to monitor that manager. If that manager does not have the disclo- sure policy or the communication skills to articulate what are com-


12 May 2021 portfolio institutional roundtable: Fixed income


plex assets, it becomes difficult to build confidence in terms of monitoring the manager. So, the ability to communicate around the asset class, such as performance, is a key component. Martin: You need people who can deal in this asset class because bonds are a specialism.


A lot of the fundamentals have not changed, but there are different additional questions that I would ask now. One is around how they handled the pandemic.


It is also important to consider what a bond manager is doing on responsible investing. Given the current environment, delve beyond ESG integration which was perhaps sufficient three or four years ago. The story has moved on.


I am not interested in the apple pie-type statements, but what can they measure? What impact can they show? How are they doing things differently with TCFD reporting coming our way? How are they aligned with the Paris Accord? The transition pathway? It is an important topic and you need to find a partner that can help you on this journey.


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