We have argued that asset owners should consider moving away from investing in strategies benchmarked to the Bloomberg Barclays Global Aggregate Bond Index. This enables a more focused portfolio construction approach, with for example, specific allocations to government and corporate bonds established. However, we understand that many asset owners invest in global aggregate strategies for various reasons. With this in mind, we have refreshed our manager line up and encourage asset owners to review their allocations to global aggregate bonds to check they are still suitable for their needs.
Asset owners invest in global aggregate bonds for several reasons
Recognising that many institutional investors still invest in these strategies, we reviewed and refreshed our line up. As part of our process, we rated two new managers. We also removed (“downgraded”) two from our line up. Skill factors are not static, and things change at the manager, such as corporate events and senior retirements for example. This has led to team instability at a number of houses and has reduced our conviction in their capabilities.
We screened the investable universe qualitatively and quantitatively. We also screened managers for holding appropriate licencing arrangements in place for our global client base.
The number of managers asset owners use depends on client specific governance requirements. As many of our clients invest across multiple global aggregate managers, we evaluated how correlated candidates’ excess returns were with our existing line up (“existing managers”) and each other, as shown in Figure 1 below.[1] High correlation with our existing line up is not a reason to discard a manager from the search and we recognise that our clients want choices when undertaking selection activity. However, we believe hiring multiple managers that behave in the same way can be undesirable, particularly during times of market stress. To encourage our clients to select managers that can offer differentiated returns, candidates that were highly correlated with our existing line up or with each other were less likely to proceed to the next round of the process.
We then conducted a series of meetings with the managers on the shortlist. Our areas of focus included:
We awarded "Preferred" ratings to two new managers who we believe to be best in class. We had previously removed two managers from our list, reflecting our reduced conviction in the ability of these managers to generate sustainable alpha for our clients.
It may have been some time since asset owners last reviewed their global aggregate manager line up. Our recommendation to disaggregate global aggregate strategies is unchanged, however we recognise some asset owners may need to invest in strategies benchmarked to the global aggregate bond index. We have therefore undertaken an extensive review of the universe and have refreshed our ratings. We encourage asset owners to undertake a review of their existing exposures, with a view to potentially disaggregating the aggregate or refreshing their line up.
Please reach out to your client consultant who can provide further information on how WTW can help you review your existing managers and suggest changes as necessary.
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