Multi-Sector Fixed Income – Leveraged Finance

Client-Specific Concerns

The client, an Australian superannuation fund, was seeking to expand its existing allocation to US leveraged loans to include high yield bonds and securitized credit; in doing so, the client wanted to move beyond its geographically focused, US-centric remit to embrace a global opportunity set. Although familiar with the underlying exposures within these additional securities, the client wanted to explore the range of potential solutions available in pooled fund formats—particularly given the challenges inherent to the custody arrangements required for leveraged loans. The client planned to allocate AUD80 million to the new mandate.

Outcome

• Exploring a range of implementation solutions: bfinance’s team began by working with the client to gain a clearer understanding of multi-sector fixed income strategies that focused primarily on leveraged loans and high-yield bonds. Given the lack of broad investor demand over the past few years, however, pooled fund solutions were limited, so bfinance also introduced the client to a wider range of strategic approaches that incorporated securitised debt and emerging market corporate debt—while still retaining a core exposure to global loans and high-yield bonds.
  
  
• Providing detailed analysis and performance assessment: given the varied approaches to managing assets in this space, bfinance worked with the client to assess the quality and resilience of individual managers’ investment strategies. This process included rigorous analysis of the teams and their breadth of resources as well as research into how the managers’ funds had evolved over time, including the level of asset-class rotation and balance of allocations between the US, Europe and other geographic regions. These undertakings were bolstered by bfinance’s quantitative analysis, which focused on each strategy’s ability to demonstrate steady risk-adjusted returns and credible downside protection in risk-off market environments.
  
  
• Negotiating competitive fees: The client had an incumbent manager in place and wanted to achieve significant savings on management fees, so fee proposals were benchmarked against this original mandate. Additionally, investor expectations around fees in Australia were generally much tighter than in other parts of the world, leading to increased pressure on asset managers’ pricing proposals—a challenge that bfinance met by implementing its peer assessment process. The review helped deliver attractive proposals from the outset of the tender and bfinance was subsequently able to generate additional savings through negotiated discounts as the manager search process reached the final stage.