The SDG Engagement High Yield Credit Fund will be offered to non-US investors as a Ucits product managed by Hermes Investment Management, and a mutual fund will be available in the US, advised by Hermes affiliate Federated Investment Management, according to a media statement.
“We will invest in companies which we expect to be SDG leaders in the future, so some may be at the early stages of implementing SDG standards,” Mitch Reznick, Hermes head of research and lead manager of the funds, told FSA.
The funds intend to support sustainability initiatives such as the UN-backed Principles for Responsible Investment, which has called for fund managers to engage more effectively with bond issuers and the IFC’s Operating Principles for Impact Management.
UBS Global Wealth Management is providing (an undisclosed amount of) seed capital for the funds and will sell them through its platform to both US and non-US clients. They will form part of the Swiss firm’s $5bn SDG (sustainable development goals) related impact investing commitment.
“Engaging with firms as issuers of debt as well as equity is an important new step,” said Mark Haefele, chief investment officer at UBS Global Wealth Management in the statement.
The Hermes SDG Engagement High Yield Credit Fund will be available on 2 October in European jurisdictions, and also for accredited investors in Singapore. Reznick is joined as co-manger, Fraser Lundie, who is head of credit at the firm.
The Federated Hermes SDG Engagement High Yield Credit Fund will be available to US investors on 26 September, and also is managed by Reznick and Lundie.
Federated Investors is the parent company of Federated Investment Management and the US distributor of the fund, Federated Securities, and last year bought a majority stake in London-based Hermes Fund Managers Limited, which operates Hermes Investment Management.
Aaron Hay at Hermes will be “lead engager” on the new fund, and his task is to work with the companies, whose bonds the fund holds, to improve operating practices and drive positive change in line with the United Nations Sustainable Development Goals framework, according to Reznick.
“The portfolio will be diversified among 80-100 holdings across US and European high yield bonds, and emerging market hard currency debt, with a tilt towards long duration issues to pick up additional yield spread,” said Reznick.
The average yield-to-maturity will be around 4.5% and the average credit rating about BB-, with concentration in the basic materials, finance and healthcare sectors where SDG can be most clearly defined, according to Reznick.
SDG fund trends
Hermes has already set up equity funds with so-called SDG “engagement” and “impact” themes.
The $360m SDG Engagement Equity fund aims to achieve superior financial returns through buying the stocks of companies that are at an early stage of implementing SDG practices within their own operations and in their relationships across their value chains, fund manager Hamish Galpin told FSA earlier this year.
Reznick told FSA that the new high yield credit fund has a similar investment philosophy and strategy.
The $240m Hermes Impact Opportunities Equity Fund, managed by Tim Crockford, has a more explicit objective of looking for companies that have purposefully aim to create a positive social or environmental effect through their products or services, and eventually become market leaders in their sectors.
“We try to identify companies in nascent industries that are likely to grow their business models to become mainstream companies in the future,” Crockford told FSA.
Meanwhile, other fund houses, such as M&G have been developing their ESG capabilities and credentials in high yield fixed income investing.
A recent study by JP Morgan Asset Management found that applying an ESG overlay on a corporate fixed income portfolio can improve returns and reduces volatility.