Performance influencers: Key factors to consider in Responsible fixed-income Investing

August 23, 2019 — In this Q&A, the Eaton Vance floating-rate loan team offers its perspective on today’s loan market.

By: Craig P. Russ; Andrew Sveen, CFA; Ralph Hinckley, CFA; Christopher Remington

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By Vishal Khanduja, CFACalvert Fixed Income Portfolio Manager and Brian S. Ellis, CFACalvert Fixed Income Portfolio Manager

This is the second in a series of blogs based on Calvert's white paper: Responsible fixed-income Investing: How Calvert delivers for asset owners.

Boston - Quantitative studies have illustrated the benefits of embedding ESG factors into an investment process when looking at long-term, risk-adjusted returns.1,2 As these studies shift focus from public equities to other asset classes, including fixed income, we expect the findings will continue to show similarly benefical results.

We have long argued that fixed-income investors should benchmark fully integrated strategies to broad market indexes and peer groups rather than ESG subsets. This is a result of our long-held view that an issuer's fundamental quality cannot be completely considered without understanding how it is managing its financially materal ESG risks and opportunities. We recognize, of course, the unique challenges and opportunities that arise in research and portfolio construction. We believe success in the space ultimately depends on a combination of focus, philosophy, resources, and experience.

The quality condundrum

Equity investors often find a correlation between quality ESG companies and fundamental quality. In active, multisector fixed-income strategies, managers typically do not limit their opportunity set to issues of the highest credit quality. That's because such issues generally have relatively tight credit spreads that can limit total return potential.

For a manager seeking to integrate ESG factors, this poses a dilemma: Public ESG data supplied by vendors is most readily available for the highly rated credits included in the benchmark. Issues with lower credit ratings often have good ESG scores, undisclosed to the public, along with attractive spreads. But, those issuers often exhibit some combination of weaker credit metrics, higher leverage and underlying fundamental challenges.

Expanding our scope

Much of the publicly available ESG data is inconsistent and incomplete. Calvert's methodology incorporates proprietary ESG information sources and research, so we can vet and expand upon public sources as necessary, and maintain a consistent framework for analysis. Thus, we view the fragmented nature of ESG information as a potential alpha source - a way not just to mitigate risk, but to identify opportunities. Most importantly, however, is the resulting opportunity set, which is broader and includes issuers of all sizes and credit qualities, including non-public issuers.

Maturity and capital structure

Fixed-income investing inherently offers different ways to invest in a particular issuer. Investors can choose from various maturities and parts of the capital structure depending on outlook, risk tolerance and valuation. An issuer's ESG performance at times may be material enough to affect our fundmantal view and our maturity and capital structure decisions.

Consider a company that is striving to address its long-term carbon transition risks, and may merit longer-term, longer-duration investment. But it may also have deteriorating governance - something that might warrant limiting exposure to shorter-term or more senior debt. The ability to implement investment decisions closely aligned with our conviction levels, based on material ESG information, is a significant advantage to our process.

Bottom line: In active, multi-sector fixed-income strategies, like Calvert's, we believe it's necessary to look beyond benchmark positions to maximize performance. Calvert's particular combination of ESG focus, philosophy, resources and experience allows us to review the broadest possible range of issues across credit and ESG metrics.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.