MFS Investment Management has added to its global fixed income capabilities by launching a UK buy and maintain credit strategy, following increased demand from defined benefit (DB) schemes and insurers.
The strategy, the asset manager said, aims to achieve long-term returns through low turnover and the sustainable capture of credit risk premium.
Kelly Tran, head of UK and Ireland institutional sales at MFS, said, “We have seen the increased demand for buy and maintain portfolios from UK DB schemes and insurance companies.”
She added: “Generally, these strategies are used as a component in one of two distinct investment approaches, the first aimed at self-sufficiency on the part of schemes working towards buy-in or buy-out, the second an approach in which insurance firms manage the assets’ post–risk transfer transactions.”
She noted that the MFS strategy has three advantages:
1. it has the potential to deliver investors more certainty on returns;
2. it aims to mitigate the downgrade and default experience in the portfolio; and
3. trading costs will be lower and savings can be passed on to the client directly.
While buy and maintain strategies have been available in the UK for several years, there can be a marked difference in how managers deliver on the approach, MFS said.
Owen Murfin, institutional portfolio manager at MFS, said: “One thing that has surprised me is the varying levels of diversification among different managers. Diversification is key to risk management and portfolio construction, but nowhere is this more important than in buy and maintain portfolios.”
He said that yield optimisation is a significant consideration, but it should never come at the expense of prudent diversification across a range of factors.
Important investment trends can be reflected in a buy and maintain strategy, including the growth of ESG investing, including a growing focus on carbon neutrality.
This is particularly relevant, MFS said, given that new climate change governance and disclosure requirements contained within the Pension Schemes Act 2021 came into force in October this year.
Many asset owners in the UK have made their climate pledge, and MFS has published its own climate manifesto and joined the Net Zero Asset Managers Initiative.
Overseas banking group close buy-in deal for UK scheme
The UK pension fund of an overseas banking group has completed a buy-in deal worth £17m (€20.2m) with Just Group.
The deal, which completed on 3 August for 54 pensioners. was assisted by K3 Advisory and its business-to-business partner Cartwright, providing actuarial and investment advice. Professional trustee services were provided by Capital Cranfield, with legal advice to the trustees being provided by Blake Morgan, it was announced.
The identity of the banking group remained undisclosed.
Peter Jennings, business development manager at Just Group, said: “Smaller schemes can be underserved in the busy current market. We are pleased to have secured the benefits for this group of members.”
He noted that to be able to work with smaller schemes insurers need an efficient process in place, including Co-operative initial discussions on quote delivery followed by a clear and efficient timeframe between quote, decision and transaction.
“The busier the market becomes the more important it will be for schemes to be soundly prepared so the process can be as straightforward and efficient as this transaction,” Jennings added.
Thomas Crawshaw, senior actuarial consultant and transaction lead at K3, said: “We secured highly competitive pricing, with Just Group coming in at a level below the scheme’s technical provisions, which meant all pensioners could be included.”
He said that to minimise the risk of the markets moving against the quote and completion of the deal, K3 also negotiated a price lock based on gilts.
Tom Hawthorn, senior investment consultant at Cartwright, said: “If a scheme is thoroughly prepared, and transaction ready, as this one was, then there is no reason why it can’t move quickly to avail itself of the same market opportunities and favourable funding conditions that are available to larger schemes.”
Independent trustee Andy Cheseldine, of Capital Cranfield, said: “The whole process was extremely efficient and it’s very rewarding as a trustee to improve the security of members’ benefits for a small scheme, particularly given the recent market turmoil.”