The next new investment trend shaking up the wholesale fixed income sector
The lowdown on 'buy and maintain'
Not all institutional trends trickle down to the wholesale market.
Liability-driven investing is one that for a number of reasons has not, while the rotation from UK equities into global equities, a seismic move in the institutional space, has been less significant in the wholesale market.
Some trends do, however, break through. 'Buy and maintain' could be the next.
A fixed income strategy familiar to insurers and increasingly pension schemes, buy and maintain seeks to avoid the cost and performance costs and inefficiencies of both traditional active and passive management by harvesting the maximum opportunity in the bond markets as cheaply as possible.
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It does so by investing in fundamentally strong corporate bonds which can be held to maturity, thereby limiting the transaction costs that can be so corrosive to investment performance.
For institutional investors, this approach makes a lot of sense. Defined benefit pension schemes are maturing rapidly and finding themselves with insufficient income to pay members' benefits, inspiring them to turn to strategies such as buy and maintain to meet their future cashflow requirements.
While a lack of cashflow is not the same problem for wholesale fixed income investors, one of the broader underlying issues buy and maintain seeks to overcome - high costs in a low-income world - clearly is.
In the current market environment, asset allocators are typically not seeking to increase their exposure to fixed income. They are, if they are doing anything, shifting allocations between the sub-asset classes.
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But their options at the moment are limited. An investor in sterling credit or global credit for instance, is receiving a potential return of perhaps 1%-3%. Generating additional alpha within that spread, net of costs, is difficult.
Compounding the problem is fees. Many investors will still hold corporate bond funds purchased a decade or so ago with an annual management charge of 0.75%. Much too high in today's lower yield and cost-conscious world.
A buy and maintain strategy, by contrast, will typically have and overall charge 0.15%-0.17%. Investors could, therefore, switch strategies and save more than 0.50% while maintaining their exposure to high quality corporate bonds.
The balance could then be banked or reallocated into another asset class that offers the potential for real alpha. Even for asset allocators who are unlikely to have legacy corporate bond funds in their portfolios, the saving would still be significant.
If you assume the typical asset allocator is paying 0.30% to 0.35% for their corporate bond exposure, a buy and maintain strategy could still cut their cost outlay by half.
By nature, buy and maintain will never shoot the lights out. It is designed to produce a consistent second quartile return for a low fee. As a margin play, it has rarely been a top priority for investors with other things to focus on.
In a world in which fees are under mounting regulatory scrutiny, however, this may change as investors increasingly assess value for money.
Few strategies gain immediate traction with investors and, despite raising billions in the institutional space, it may take time for buy and maintain to find a wholesale audience.
In its favour, however, is the fact that it is not a highly complex product fund buyers will struggle to understand.
Indeed, those familiar with short duration bond funds will recognise buy and maintain's core approach: purchasing bonds and holding them to maturity.
In a long duration strategy, that means finding strong credits which can minimise downside risk and the potential impact of market shocks and defaults.
In a low-income world in which fees can have a major impact on returns, buy and maintain may well end up having a bigger role in the wholesale market than it does at the moment.
Rob Bailey is head of UK wholesale distribution at AXA Investment Managers
