Value Sustainable Core
The Value Sustainable Core strategy seeks to outperform the benchmark by 100 basis points over a market cycle while giving special consideration to certain sustainability criteria.
The strategy uses a value-driven approach and seeks to generate return by investing in a portfolio of investment grade, fixed income securities. The strategy seeks to add value by capitalizing on imbalances in the relationships among sectors and individual bonds. We believe that investing in undervalued sectors and bonds and selling expensive ones using a relative value assessment is the ideal process to capture value.
The strategy focuses on best-in-class issuers across the fixed income universe and avoids some of the issuers that are more challenged from an ESG perspective, and taking few steps to improve. In doing so, the team uses several proprietary data-driven tools to assess an issuer’s overall sustainability profile and to quantify an issuer’s social benefits and costs in economic terms. This enables the team to understand how the profitability of that issuer would be impacted if these social costs were translated into financial burdens due to either government intervention or societal pressure. We believe our overall investment approach informs our understanding of an issuer’s fair value and enhances our ability to deliver sustainable returns.
The strategy typically invests in US dollar-denominated fixed income securities including governments, corporate bonds, securitized bonds, sovereign and supranational entities, as well as municipal bonds. The strategy is duration neutral to the benchmark. It is our view that interest rate forecasting is not a reliable source of returns and thus we focus our efforts on delivering alpha through sector rotation and security selection.
The US Multi-Sector Fixed Income team is made up of several New York based portfolio managers dedicated to value-oriented fixed income investing, and are supported by an experienced team of more than 30 global credit analysts, with geographical and industry expertise.
The investment philosophy for the strategy is based on the premise that pricing inefficiencies exist in the market and our ability to identify those leads to superior investment performance. The portfolio managers focus on identifying bonds or sectors whose valuations have become dislocated from the underlying fundamentals, primarily due to technical reasons. We believe that purchasing undervalued bonds and selling them once they are fully-priced rewards investors. In doing so, ESG factors are especially important as an issuer’s sustainability will impact how we view the valuation of each security. Portfolio allocation is independent of the benchmark and customizable to a client’s risk appetite. Our sector and security weightings are made independent from the benchmark and our positioning reflects our value approach, as well as the attractiveness of the opportunities relative to the broad market.
The US Multi-Sector investment team is responsible for the implementation of the Schroder Value philosophy. Portfolio managers collaborate with the sector specialist teams as well as the credit analysts, both of whom follow a disciplined, rigorous framework that combines fundamental research with relative value assessment. Our fixed income process consists of four distinct steps:
- Investment themes: Conduct in-depth proprietary market research (fundamental, quantitative and technical) to develop investment themes that will dominate markets over the long term
- Portfolio strategy: Based on investment themes, develop and prioritize investment strategies which will determine optimal portfolio positioning across sectors. This is done in close collaboration with the sector specialist teams
- Portfolio construction: Implement strategies using a relative value framework with a focus on overall risk level and execute sector and security decisions using the input of the credit analysts and the traders
- Risk management: Ensure that mandates are managed in a manner consistent with their performance objective and corresponding risk profiles. Our three pillar approach provides a framework to continually review and monitor portfolios
The below graphic is an illustration of our investment process:
Source: Schroders. There is no guarantee that the investment process or strategy will produce positive returns or protect against a loss of principal.
Sustainability for this strategy is achieved through a three-pillar approach:
1) Baseline revenue-based exclusions: the goal is to avoid the potentially unpriced financial risks associated with issuers whose business activities may be deemed to be controversial or harmful to the environment and/or society
2) Internal analyst ESG ratings: our credit analysts, with support from our sustainable investment team and data insights unit, use our proprietary investment tools and their own fundamental research to determine the quality of an issuer’s ESG practices and the direction the issuer is headed in managing their ESG risks
3) Better overall impact profile than the benchmark: this is measured using our proprietary tool SustainEx, which quantifies the impact in dollar terms that an issuer has on society. Our aim is to focus is on issuers with improving sustainability profiles.
Exclusion list further limits the investable universe which could impact investment outcomes.
- Value-driven, opportunity-based investment process
- Portfolio of investment grade bonds only, with no interest rate forecasting or currency speculations
- Investments are chosen based on relative value without reference to qualitative content of the benchmark
- Sector allocation and security selection are the main sources of generating return
- Daily interaction among key decision makers to evaluate opportunities and relative value
- Better overall impact profile than the benchmark
- Baseline revenue-based exclusions
- Focus on issuers with improving sustainability profiles as determined by internal analyst ESG ratings
- Separate Accounts
- Mutual Fund