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Buy-and-maintain: bespoke by default

Buy-and-maintain: bespoke by default

18-06-2018 | Insight

A buy-and-maintain strategy inherently requires a customized solution. This approach focuses on capital retention for the long term, by actively monitoring downside risk throughout the market cycle. Costs are limited because turnover is kept low. This investment style is ideally suited to institutional investors with fixed-income portfolios and a long investment horizon, such as the matching portfolios of pension funds and insurers.

  • Remmert Koekkoek
    Remmert
    Koekkoek
    Head of Insurance and Pension Solutions
  • Yvo Schoemaker
    Yvo
    Schoemaker
    Portfolio Manager

Speed read

  • Portfolio management in consultation with the client
  • Focus on the long term, with low turnover and low cost
  • Continuous monitoring of downside risk

A buy-and-maintain approach is strategic, but certainly not static. The portfolio manager and the client work closely together and the portfolio is continuously monitored and adjusted if necessary. The strategies are fully aligned with the client’s wishes and therefore usually do not have a standard benchmark. In effect, the client is a co-manager of the portfolio and determines the direction and final objective for the portfolio.

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Buy-and-maintain at Robeco

Due to our Dutch background, we have extensive experience of pension funds and insurers. We understand the many challenges they face, such as regulations that can have a significant impact on their portfolio requirements. Our buy-and-maintain solutions are specially designed to reflect the specific investment convictions and objectives of our clients. The main features are:

  • A customized and research-driven solution, designed in consultation with our clients
  • An ongoing dialogue about the portfolio, the markets and regulation
  • Direct access to more than 40 fixed-income portfolio managers and analysts
  • Low turnover: as transaction costs lower a portfolio’s return, there should always be a good reason for a transaction. We don’t jump on every bandwagon

Our philosophy: thorough research and cautiousness

We are convinced that all investment decisions should be based on research. As an active manager, we understand the value of good research. For our buy-and-maintain clients, we apply our own fundamental and quantitative research, with a long-term vision and a focus on risk. We believe in cautious investing, with a central role for risk management.

Our buy-and-maintain portfolios take the client’s investment objective as their starting point rather than a standard index benchmark. Our approach can be used for both overarching strategic allocation decisions and specific instrument-selection decisions. Among other things, our specialist buy-and-maintain portfolio managers use the knowledge of our teams specializing in government and government-related bonds, corporate bonds and derivatives.

So how does the management of such a portfolio actually work? As the name suggests, the process consists of two phases: the ‘buy’ phase and the ‘maintain’ phase.

Buy: the client’s requirements are the starting point

The accumulation phase is even more important than for traditionally managed portfolios. This phase involves close consultation with the client and devotes much attention to the design of the portfolio and the reinvestment process. We analyze and discuss the client’s specific cash flow and liquidity profile in detail, as well as their investment objective, risk appetite and investment philosophy. In the strategic allocation we look for an optimal balance between risk, return, liquidity and matching effectiveness.

Maintain: continuous monitoring

Robeco operates in a changing market with regulation that is also continually subject to change. We therefore continually consider whether strategic and issuer-specific decisions still apply. The maintain phase involves continuous monitoring of risk at all levels in order to ensure credit quality and matching effectiveness at all times. We also continually monitor that the investments still correspond to the investment objectives.

Our approach minimizes portfolio turnover, and therefore transaction costs, among other things by limiting forced sales and adjusting the portfolio only on the basis of risk. We therefore do not do this regularly at set times, and we do not add new bonds appearing in benchmarks as a matter of course. We limit costs by thorough transaction cost analysis, or TCA. With our proprietary TCA tool, the traders and portfolio managers can see the costs of a particular allocation in advance and phase large portfolio inflows.

Why not passive?

A passive solution that follows a preselected index may seem to be an efficient and relatively low-cost way for institutional investors to manage their investments. However, we believe that each client is unique and that following a standard benchmark is not usually the most suitable approach. Following a standard index also involves a number of shortcomings. For instance, turnover is relatively high because the portfolio has to be adjusted as closely as possible in line with the index portfolio. Secondly, this can lead to undesirable risks, because the weights are often based on the amount of debt outstanding and on credit rating agencies. See our article 'The investment objective as smart benchmark for the LDI portfolio' for further information.

Buy-and-maintain strategies are usually as low-cost as or even cheaper than passive solutions, since they involve less turnover (and therefore lower transaction costs) and competitive fees.

An increasing number of institutional investors are focusing more on the sustainability of their portfolios. Buy-and-maintain strategies offer an excellent opportunity for integrating the ESG criteria that are appropriate for you. This leaves the credit and matching quality and return potential of the portfolio fully intact.

Conclusion

A buy-and-maintain portfolio starts with the client’s wishes. It involves a long-term relationship. This approach is strategic, but not static: we actively monitor the strategic allocation and adjust this if desired and in close consultation.

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