PORTFOLIO INSIGHT


driven by where we are getting best paid. We will not maintain a structural allocation to certain markets just for the sake of it.


MEETING THE NEEDS OF TODAY’S PENSION FUNDS


The advantage of a MAC strategy is that it can fulfil a variety of needs for pension funds. For smaller pension funds, MAC can be a fixed income solution rather than trustees having to decide when to invest in invest- ment grade or what an allocation to high yield should be.


MAC gives pension schemes the opportu- nity to outsource their fixed income strategy whilst accessing a variety of markets. At the other end of the spectrum, MAC offers opportunities for bigger pension funds looking for attractive returns but not taking too much incremental risk. Maybe they want to substitute some of their invest- ment-grade bond allocation into a MAC solution. It offers a little extra yield but also attractive drawdown characteristics. For others it could be that they have had a great run with high yield but are worried about where we are in the cycle. Again, MAC can be that substitute by offering a similar upside but with better downside. Pension funds could also use MAC as part of a de-risking strategy. So pension funds which have had a great run from an equity standpoint and are looking to take a few chips off the table but not get too defensive; that’s where MAC comes in. Our flagship strategy seeks returns in excess of Libor plus 4% p. a*. An attractive return profile but with historically far more compelling drawdown characteristics than equity. Trustees on a DB pension plan are ulti-


mately trying to get back to full funding or to a funding level where they can approach a buy-out or buy-in. Over the past five or six years their funding level has jumped from say 70% to above 90%. They are now look- ing at maintaining and improving that funding level. They want to stay in some- thing that could deliver attractive returns but equally has the dynamism and the defensiveness that will protect the overall portfolio during difficult times. That is a fear for trustees, if you go back to a 2008 scenario, your funding level collapses. For the DC pension plan trustee, the big- gest concern is member awareness and willingness to stay invested. What scares the individual DC trustee are huge draw- downs: Members announcing that they are not going to put any more money into their pension. Yet most new savers are going to be in their DC plan for 30 to 40 years so they will need to be invested in something that can create an attractive yields and strong total return. Our version of MAC has the dynamism and defensiveness that, should the tide turn, could offer some protection.


MAC – A DYNAMIC APPROACH SEEK- ING TO UNEARTH THE BEST OPPOR- TUNITIES People are asking when the cycle is going to end and we believe that MAC can help pro- tect them against those risks. We believe MAC is the perfect strategy for that question. If a pension fund has had a great run within the high yield market post- financial crisis, the natural question is when do I get out of it? When do I draw a line under it? By the same token, if you have been invest-


* In excess of 3-month GBP LIBOR + 4% p. a. gross of fees over a full credit cycle.


ed in investment grade, with the rally we have had, when does that reverse out? Trustees are undoubtedly exposed to these questions if they are invested in individual credit markets and are not dynamically adjusting to the environment. MAC is ideal because it gives managers more levers to manage such scenarios. If markets do go into reverse, undoubtedly there will be a huge opportunity for dynamic managers, as you see divergence in the performance of different asset classes. That’s exciting as a MAC manager. If one segment of the credit market sells off significantly more than another, it opens opportunities for us to add a huge amount of value, but inves- tors need to move quickly. These sell offs and corrections happen fast, making asset allocation calls exceptionally difficult for pension funds that are one step removed. Whereas being at the coalface and ready to move quickly, those are things that we can capture.


In this environment, with the levers we can pull, we are still generating an attractive yield but, as markets tighten in, it typically is more about capital preservation, manag- ing and protecting the downside and wait- ing for a correction.


Issue 88 | November 2019 | portfolio institutional | 23


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