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Impact Investing

IPE special report May 2018

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Diary of an Investor: Stretch and flex with credit

Years ago, people used to claim that the equity-risk premium was the most important metric in a pension fund’s long-term investment plans. Like other funds, we did increase our equity weighting at the end of the 1990s and early 2000s. Now, we are too old (at least in terms our maturity profile) to contemplate a high weighting in equities and we have diversified our asset portfolio in other ways. 

It’s not just our duration, though. The regulator is tough and we have our sponsor’s accounting requirements to take into account. Overall, equity volatility can be too hard to stomach.

Like our fellow investors, Wasserdicht’s international pension funds have been on the search for yield since the financial crisis. On one of our video conference calls, the Wasserdicht pension heads outlined what they have been doing in the area of credit and diversification.

Cliff in Toronto was straightforward. ‘We’re not as sophisticated as some of our peers here in Canada. To get a real advantage in private markets you have to have scale. But we have been on the diversification trail in direct lending funds and private debt for a while now,’ he said.

One of the key questions is high yield and emerging market bonds. Jim in Dallas said it’s time to buy: ‘Everything got trashed in January and February. There are significant buying opportunities.’ 

Jim also mentioned the role business development companies play in America, while Hans in Frankfurt outlined the EU’s plan for a capital market union and touched on the ECB’s plans to extend asset purchases to investment-grade bonds. I updated the group on our property lending investment in Germany and Yoshi in Tokyo spoke about the opportunity he sees in dollar emerging market debt. 

Later that week, Geert and I are running through the performance reports of our multi-asset credit and direct lending fund investments ahead of an investment committee meeting. 

Our multi-asset fund performed reasonably well, ahead of a slight dip in early 2016. The manager of the fund assures us that he is well placed to take ‘selective opportunities’ in undervalued assets.

We are also putting together a presentation on credit markets for our investment committee. Geert is preparing PowerPoint slides on default rates and concentration risk, while I am writing a commentary on the various areas within credit for the benefit of the committee members.

‘Think of it this way,’ I tell the members of the investment committee. ‘Credit is like an all-over form of exercise. Taking a long-term view is like long-distance running. You have to stay the course. We also need the bench strength to do some of the heavy lifting in terms of analysis and documentation. But we also need flexibility and agility to take advantage of dislocations and opportunities as they arise.’ 

Pieter Mullen is investment director at Wasserdicht Pension Funds

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