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Client Solutions case
Customizing a fixed income replication solution for a pension plan
Passive fixed income strategies, like corporate bond index funds, are popular for their low costs and simplicity, as they aim to replicate the performance of a conventional benchmark index. However, many sophisticated investors seek to incorporate specific investment or sustainability objectives into their portfolios that are not represented in a conventional benchmark, as well as avoiding some benchmark inefficiencies. This is how we built a bespoke solution for a pension plan.
Objectives
Alignment with conventional benchmark returns: The solution should have a low tracking error versus the conventional benchmark, with similar return levels.
Low turnover to increase cost efficiency: This aimed to avoid active management costs and limit trading to fundamental credit risk, sustainability and tracking error considerations.
Avoiding high-risk names: All issuers in the portfolio were carefully selected based on in-depth fundamental analysis, aiming to add performance and avoid high-risk names.
The pension plan wanted to embed their specific sustainable investing objectives, with the tracking error budget mainly being used to meet these objectives:
At least 50% GSS bonds: Making a material allocation to green, social and sustainable (GSS) bonds, promoting a positive environmental and social impact
CTB-aligned carbon footprint: Ensuring that the portfolio’s carbon footprint aligns with the European corporate bond Climate Transition Benchmark (CTB), supporting a low-carbon economy
Client exclusion list: Excluding specific industries or companies that do not align with the client’s ethical and environmental values
Exclusion of negative SDG scores: Only including bonds that have positive scores in Robeco’s SDG Framework to align with global sustainability objectives
No climate laggards: Excluding companies with a high carbon footprint and do not score aligned or aligning with Robeco’s Climate Traffic Light Assessment
Solution
The solution was to create a specific Climate and SDG portfolio for the client tracking the conventional Euro Corporate Benchmark. How this works is shown in the table below:
Climate and SDG portfolio vs. benchmark
Source: Robeco. Past performance is no guarantee of future results. For illustrative purposes only.
Outcomes
The portfolio achieved its objective, with a low tracking error of approximately 0.25%, while the portfolio’s management style aimed to ensure a significantly lower turnover than the benchmark. The portfolio also showed an improved fundamental score, where the scores range from -3 to +3. This scoring by our credit analysts gave an indication into the financial health and operational efficiency of the selected companies, compared to rating peers.
We also ensure that the portfolio is comparable in terms of credit quality and market liquidity to the conventional benchmark. Importantly, the portfolio still has a yield of approximately 10 bps above the conventional benchmark, while meeting the client’s specific investment and sustainability objectives. The SDGs can be used to further generate a targeted impact on specific investors’ sustainability objectives through alignment with a specific set of the UN SDGs.
