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TwentyFour Asset Management’s purpose-built Observatory platform scans the global universe of bonds looking for ESG stars

Creating a truly sustainable bond fund is no mean feat. Unlike the listed equity universe, where ESG data is more readily available, it is often sorely lacking in the fixed income space. At the same time, the problem for fixed income managers is exacerbated by the complexity of a bond’s structure, consisting of multiple parts which must all be individually assessed.

Yesterday the US Federal Reserve released the results of its annual bank stress test, subjecting the 23 largest US lenders to a punitive set of scenarios. Some observers might think the events since March 2020 had been sufficient to test the resilience of the banks, but the Fed went beyond this recent real-life challenge and tested bank balance sheets against a range of hypothetical crises.

The definitions of what ESG really means are still blurry and there is no one-size-fits-all approach to sustainability. If anything, the growing popularity of these funds has highlighted the differences in the expectations of both individual investors and institutions when it comes to ESG.

Fixed income investors are in "pole position to push for change" when it comes to ESG

In this unique virtual event from TwentyFour Asset Management, TwentyFour CEO Mark Holman guided us through the AT1 market as we discovered what role he thinks these bonds can play in a fixed income portfolio.

We have a high opinion of Kensington as a mortgage lender and when we score it for ESG as part of our investment analysis it performs very well even without this latest Green initiative, but we do feel it can stretch further.

All told, while we think relative value in WBS can be attractive, we believe the trend of refinancing in the bond market is only going to continue in the coming years, though it will be gradual.

With all of the recent data pointing to higher inflation expectations and the Fed expected to maintain a transitory interpretation, we will be focusing our attention on comments from the various regional Fed presidents on conditions that could prompt a tapering move at some point in the future.

The remarkable pace of change in the markets as the global economy reopens points to opportunities in higher yielding bonds, with financials in particular set to benefit, says TwentyFour Asset Management CEO and portfolio manager Mark Holman.

We believe UK government bonds are ultimately most vulnerable to a rise in inflation, and the 10-year Gilt currently trading at 0.73% does not come close to compensating for this.

Frustratingly for fixed income investors looking to buy bonds, the data seem to fully justify the high valuations we see in so many parts of our market at the moment; it really would not make sense to be able to buy bonds cheaply when conditions are so good.