The fund is co-managed by James Tomlins and Stefan Isaacs, the same duo that already manages M&G’s conventional global high yield bond fund.
The new global high-yield bond fund uses a two-pronged ESG screening process. In a first step, it screens out companies from the ‘sin sectors’ tobacco, alcohol, adult entertainment, gambling, thermal coal, defence and weapons. The fund also excludes companies that are in breach of the UN Global Compact Principles.
As such, about 10% of the US high-yield universe is exluded, and 15% of the European high-yield universe. As a second step, “any companies that are classified as industry laggards displaying poor ESG credentials compared to its industry peers” are filtered out, on the basis of MSCI’s ESG company ratings.
A skew to Europe
Since more than a quarter of US companies are dropped because of their poor ESG ratings (B or CCC) alone, only 62.4% of the US high-yield remains after providing for all exclusions. For European high-yield, this is 71.3%.
"A global ESG high yield strategy might be expected to display a slight bias towards Europe, given the region’s stronger ESG credentials" - James Tomlins
“A global ESG high yield strategy might therefore be expected to display a slight bias towards Europe, given the region’s stronger ESG credentials,” says Tomlins.
Since the US high-yield market dwarfs its European equivalent in terms of size, Tomlins does “not necessarily expect significant geographic differences between an ESG high yield strategy and a conventional high yield strategy,” however.
“From a sector perspective, an ESG high yield strategy would differ slightly from a conventional high yield strategy as a result of sector exclusion. However, the excluded sectors account for a relatively small part of the high yield market, and the ESG high yield universe still offers good sector diversification with no single industry dominating,” he adds.
Where the new ESG high-yield bond fund differs from its sister fund, however, is the average interest rate duration. The ESG-screened portfolio has an average duration of 3.5 years, which compares to just 2.8 years for the conventional high-yield bond fund.
“Furthermore, employing a sophisticated ESG rating methodology – which assesses a company’s ESG performance relative to its industry peers rather than in absolute terms – can help ensure that a portfolio is not skewed to a few individual sectors.”