Liontrust Responsible Capitalism Report 2024 - Flipbook - Page 111
Allocation
Economic conditions rarely hinder all parts of the fixed income
universe. For example, areas with higher credit risk react
positively to strong growth, whereas this is a headwind for quality
sovereign debt. The managers use quantitative screens, as well
as their experience of managing through the cycle, to aid in
identifying opportunities. Key to managing through the cycle is
avoiding accumulations of sustainability and thematic risk such
as exposure to energy prices, changing technologies or financial
sector contagion. Examples of sectors that may be removed from
the investment universe on the basis that they pose too great a
sustainability risk are weapons and arms, tobacco and coal.
Selection
In judging whether a company is an attractive long-term
investment, the managers analyse the following factors,
which they call their PRISM:
P = Protections (which include operational and
contractual, such as structure and covenants)
R = Risks (such as credit, business and
market)
I = Interest cover (leverage and other
key ratios)
S = Sustainability (ESG component)
M = Motivations (ESG component covering
ownership and governance)
Examples of thematic risks include:
– Commodity price risk in the energy sector where companies
are typically highly correlated to the oil price. A rise or fall in
the oil price can create a risk or fall in concert based on one
exogenous factor.
– Orphan finance risk faced by the coal industry. Investment in
companies which have a large part of their revenue coming
from the production of coal stand to be cut off from financing
options going forward.
– Disruption from technological obsolescence risk
Governance factors (which are also included in the
Motivation or M part of the PRISM analysis) include: how
the alignment of interests specifically impacts creditors.
For example, investors don’t normally consider small
Boards lacking independence to be demonstrative of
effective governance. Yet creditors may appreciate
owner-managed businesses and the care and
diligence that can come with a high degree of
employee ownership.
BIASES IN THE TEAM’S FUNDS AS A
RESULT OF ITS INVESTMENT PROCESS
The Global Fixed Income team tends to
invest in high-quality issuers which are or
demonstrate:
•
high levels of transparency (for both historical
data and the strategic direction of the companies it lends to)
The Sustainability or S part of the PRISM contains another ESG
component in the team’s investment process. The team analyses
the ESG-related processes undertaken by the issuer.
• public market businesses (within its bond issuers)
Environmental and social factors include:
• high market capitalisation, which also tends towards greater
access to capital and liquidity
1. environmental risks and resulting contingent liabilities (which
should feature as part of any credit analysis)
The team’s funds tend to avoid or be underweight:
2. the Board and overall employee mix of an issuer is examined
for its diversity
3. relationships with customers; this is analysed as part of the
broad understanding of how all stakeholders are treated
4. the accumulation of thematic risks (during portfolio construction,
the team seeks to avoid this as it can increase a bond fund’s
exposure to downside risk, like defaults and stressed prices).
• strong competitive advantage
• the parts of the market with lower-quality credit ratings
• all commodity cyclical sectors, including energy, mining,
metals and chemicals (these tend not to have much competitive
advantage and can have exposure to ESG-related risks)
• large aggregate exposures to combustion engines and bricksand-mortar retailers
Responsible Capitalism Report 2023 - 111