Hauter says they look at “[environmental, social and governance] research as a value-add to our fundamental due diligence process.”
The process is integrated from the beginning, she says. “Fixed-income ESG analysts sit alongside our fundamental credit analysts team, and they work together through every part of that, so an idea can come from anywhere.”
The Envestnet analysts note that “the strategy’s first quarter 2020 return of 2.06% displayed its ability to protect client capital during periods of volatility, while the second quarter return of 4.83% showed the team was nimble enough to take advantage of wider spread and subsequent tightening.”
Graff explains that at the start of 2020, “we did think the biggest risk the portfolio faced was recession.” So when the pandemic reaction hit the markets, it created “in some ways more volatility than September 2008,” and high-quality companies had to issue bonds “at extremely high levels.
“Because we came into the quarter with a decent amount of defensiveness, that also gave us some flexibility to rotate out of some very high-quality stuff and into some of the … longer-dated high-quality, but very widespread corporate bonds,” he says. In the second quarter, they were able to “rocket well off that.”
They also moved in large size, realizing “it was a once-in-a-lifetime opportunity.” And their research teams were able to find great impact opportunities. “This was a perfect example of where the clients seeking impact weren’t giving up anything performance-wise to get it,” he says.
Hauter notes, too, that since they have been managing the strategy, “we’ve always been focused on ESG issues that have been material to an issuer’s long-term health, prosperity and resilience over a longer period of time — [which were] a lot of issues we saw arise during the peak of the pandemic, [such as] employee treatment, customer care, health and safety, other responsible management practices.”
She adds that these are “meaningful for issuers, but the pandemic greatly amplified their importance.”
How companies handle these issues affects Brown’s view of a management team that thinks long term, Graff says: “Like willing to sacrifice a little earnings [upside] to garner goodwill with customers or employees. And now that we’re looking at this super-tight employment market, employees who were better treated during the pandemic [most likely will stay]. Even if you don’t care about societal impact, business-wise, those kinds of things were the right decisions.”
The team has about 60 holdings at any one time: about 25 to 30 corporate bonds and a smaller number of government-backed bonds.
Last year was a question mark, but as Graff says, “the biggest positive move was adding substantially to the longer-term corporate bonds in the middle of the pandemic.” Still, “the right management team was super important. In April 2020 we had no idea how long this was going to last, how high unemployment was going to go, what government support would be.
“None of that was clear at the time. So you had to be with management teams that not only had the financial wherewithal to survive a long period of decreased revenue,” but also planned to keep a sustainability program because, in the end, that was important to their business, he says.