return for the foreseeable future. If that is deemed not sufficient, you have to move up the risk profile, so there is no free lunch. We are in a different environment from 10 or 20 years ago in that the ‘easy money’ has gone.


There is a desire to have many types of credit risk and the


ability to rotate across sectors. Jim Cielinski, Janus Henderson


PI: What impact has the pandemic had on fixed income portfolios? Cielinski: Aside from rates plummeting to record lows and bonds becoming overvalued on most metrics, what has changed is the regime in which we live. This crisis passed the baton from mone- tary to fiscal policy, which created fears of a notion that you can borrow unlimited amounts and it stays affordable. So, there has been a shift in how the policy reaction will work. When we look back, this will be the moment when our framework had to adjust to the outlook for inflation, the outlook for deficit spending and the outlook for politics, in that we could see people elected on the promise of more spending. Pickering: Quantitative easing (QE) and modern monetary theory have promoted us to rip-up everything we learnt from textbooks in our youth. It has created uncertainty and an air of challenge. This is a good thing in that you cannot take anything for granted. Who would have guessed that we would end up having big govern- ment in the UK and US? At a more micro level, the pandemic has forced us to focus on quality. We need to concentrate on the covenant of those on the other side of the fixed income products to a greater extent than we did before. So, we have uncertainty at a macro level and uncertainty at a micro level, which selfishly makes my job so enjoyable.


gap? In holding growth assets, the portfolio is typically structured on the assumption that they will be held long term. So, you are allocating them against your cashflows 15 to 20 years down the line. Essentially, you are letting those growth assets grow. You are not going to become a forced seller but what you can do is exploit the upside volatility if those assets deliver stronger returns than anticipated. Key to all of this is that as pension funds mature, fixed income is going to be a much bigger portfolio component. This in an area we are focusing on. Peter Martin: With bonds it is a question of being open minded in looking for opportunities without taking excessive risks. It is not necessarily about maximising return but trying to get an appropri- ate return from the combination of assets available. Going forward, we must be cognisant of the environment we are in – where rates are low and credit spreads are tight. Quality is safe and stable and that is appropriate for some, but it is a mediocre


PI: Ian, has the pandemic forced you to focus on quality? MacRae: Our investment strategy is based on moving assets from growth/LDI to our CDI portfolio as our liabilities mature. That gives us opportunities over time to take advantage of relative pric- ing differences between cash from the LDI portfolio or growth assets compared with bonds and other assets purchased for our CDI portfolio.


The turbulence we saw in 2020 helped us transition more of our liabilities into our CDI portfolio at attractive prices relative to the assets we sold. The quality of the covenant of the bonds we buy is critical, espe- cially as, ideally, we would hold them in our CDI portfolio to matu- rity. We buy bonds that we are confident will retain their quality and income. That security comes in many forms, whether it is the covenant of the issuer or the collateralisation. Thevissen: In February and March 2020 we saw a significant spread widening, which was an interesting time to consider an increase of exposures to long term investment-grade credit. It was an opportune time, but as usual we took a careful approach, always considering potential downside risks. Before you invest with a buy-and-hold to maturity objective it is essential to have a profound long-term view of a company, for example a clear idea of


May 2021 portfolio institutional roundtable: Fixed income 9


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