Brunel and the exceptional asset manager search: Case study

Appointing a manager to run one of our funds is not a simple process. There is an enormous range of criteria we worry about when considering applications and interviewing candidates. But what is it like in practice?

Brunel’s Multi Asset Credit (MAC) fund is both complex and pioneering. Its complexity lies in its range of asset classes across the bonds universe, incorporating sovereign bonds, Investment Grade credit, High Yield credit, asset-backed securities, mortgage-backed securities and more subclasses besides. This complexity reflects our clients’ desire to gain exposure to a wide range of products across fixed income. As a result, our Responsible Investment principles had to be implemented across a wider range of asset classes than for most other funds, adding yet another layer of complexity.

We asked Daniel Spencer, Portfolio Manager for the Brunel Multi Asset Credit Fund, about how Brunel applied our principles to the MAC at the selection phase – especially on Responsible Investment.

What were the client requirements Brunel sought to address by designing and delivering a Multi Asset Credit fund?

The main request from clients was to access a range of sub-investment grade credits, and MAC provides a very clean solution to this problem. From a pension fund perspective, MAC can be useful when you are looking to de-risk from equities a bit but still generate returns in excess of defensive assets. Another reason was cost savings. The fund focuses on sub-Investment Grade (IG) credit.

What behavioural patterns among applicant managers raised flags for you during the selection process?

Two specific examples would be remuneration and misleading behaviour. If the manager doesn’t give you details on how they pay staff, or suggest compensation is linked to asset growth, or to short-term performance, that’s a bad sign. Compensation must be aligned with our objectives where feasible. We are also wary of managers who provide misleading information. For example, we asked a manager for evidence of their skill in high yield vs the broader high yield market. We were supplied with a series of relative returns vs cash, which was very misleading.

How did you assess the company culture of applicants?

There’s a huge difference between what you see on paper and the true culture of a company. There are two ways we attempt to address this: face-to-face meetings and data requests. Meeting managers and stakeholders in a face-to-face environment is usually the best way to evaluate culture. It enables us, for example, to ask the portfolio managers directly about RI implementation, because we know the RI section of written tender documents is typically influenced by an RI team. As an example, we had a portfolio manager who looked at us blankly when asked if there was a trade idea that was abandoned due to environmental concerns, so we immediately suspected RI wasn’t a significant part of the team culture. On the more behavioural side, I like to establish the type of person the Portfolio Manager is. We typically don’t buy into the star fund manager culture, where one individual holds everything together. As an example, we always look out for incidents where the PM is answering something that others should be answering in a meeting environment. If one individual is dominating the conversation, that tells you something very important.

What does it mean for a manager to adopt your Climate Change Policy in how they invest?

It’s one of the toughest questions for both us and the managers. I want to know first and foremost that they’ve read the policy. If their decarbonisation targets are set and aligned, then that’s a good start. We found that the real difference between a good and bad response is all around understanding of two-degree alignment. If the manager has no idea of the difference between a company that is or isn’t aligned to the Paris accord, then it’s a bad sign. We also found that many managers proposed alignment to our policy through exclusions alone, which is not good enough. Finally, climate change alignment has to relate to the product we’re investing in – they need to know where the carbon data is weak on, say, structured credit (a debt pooling vehicle), and how they manage that gap.

Is it hard to implement RI in credit?

It’s arguably more important to be responsible in credit versus equities because you are directly providing capital for companies to do good or bad, especially in the primary market. However, the onus is really on the manager to work it out, at least broadly, on both the carbon footprint and on social policies.

Can you give an example of a candidate showing the right kind of thought leadership?

One manager we liked in this process really understood our constraints around getting to Net Zero by 2050 in a universe that is very difficult to quantify. For example, there were feasible solutions in place where there were, say, asset classes you couldn’t really engage with over environmental protections, like EM Sovereigns. Regarding 2C alignment, the manager had a firm view on which companies and industries were and weren’t aligned, which was again rare amongst submissions. On engagement, the manager had a sensible framework to identify companies who require engagement to align with the Paris accord. Finally, the manager also showed thought leadership by looking forward at what Brunel wants to do but can’t yet do, such as scenario modelling on physical and transitional risk.

What kind of changes at one of your appointed fund management companies would cause you concern?

Changes in corporate structure – For example, are they buying or about to be bought by another asset manager? This risk has become larger in the past few years. We also look at activity within the portfolio management teams – it’s a potential issue if a key member or several team members all leave at once. Other organisational aspects we look at are in areas such as risk and compliance. High levels of turnover in these areas may imply dominance of the PM team. On the RI side, you sometimes find that a fund manager you work with has bought a controversial company – and even if it’s not your mandate, it shows they’re potentially not aligned with your criteria.

A version of this interview was also published on the UNPRI website.