Justin Craib-Cox, Portfolio Manager of the RWC Convertible Bonds team, discusses applying sustainability to a convertible bonds strategy
Convertible bonds are an inherently defensive asset class, sought after during periods of market stress due to their asymmetric risk profile. While aiming to capture as much of the upside of equities as possible, convertibles also aim to limit the downside risk of the investment.
As such, the investment process lends itself well to the application of sustainability metrics, according to RWC's Justin Craib-Cox, CFA, who joined the Convertible Bonds team in 2018 and has now re-branded the RWC Defensive Convertibles Fund to a sustainable mandate (RWC Sustainable Convertibles Fund).
In a world where sustainability has risen to the top of many investors' agendas, having a sustainable offering is becoming more and more important. Recent Morningstar figures have found that more than £50bn has been invested in ESG funds marketed to UK investors over the past 18 months to the end of June, and these inflows are likely to continue.
Seizing the opportunity
Until recently, RWC's convertibles offerings counted a global fund (RWC Global Convertibles Fund), a regional fund investing in Asia (RWC Asia Convertibles Fund), and the defensive fund. The Asian fund is primarily a regional offering for investors wanting to gain exposure to the region with lower volatility than equities, while the defensive fund aimed to take on less risk than the global vehicle.
However, Craib-Cox saw an opportunity to achieve something new with the defensive fund, whose investment style made it the most suitable vehicle for a re-focus on sustainability. In fact, he said the team didn't really have to change its investment process: "By its nature, for this fund you would look more deeply at the ESG profiles as a check on credit strength than one might for a much more equity-sensitive convertible bond, that we would hold in the global portfolio."
However, the aim was not to "jump on the bandwagon" by creating a "one-size-fits-all" approach or a strictly thematic fund. Rather, Justin looked to create a bottom-up view, using data on companies' ESG profiles from Sustainalytics, and other sources to gain a deep understanding of what is owned within the portfolio.
No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment