Designing a bespoke credit solution aligned with strategic and responsible investment objectives

We helped a pension scheme trustee design and implement a bespoke credit mandate with the aim of improving diversification, supporting income and hedging needs, and incorporating the trustee’s responsible investment beliefs in a cost-efficient way.

The objectives

A client, the trustee of a pension scheme, was reviewing its investment strategy, with a particular focus on the credit portfolio. Its existing credit mandate was no longer well aligned with the trustee’s long-term objectives, which included:

• a risk and return profile consistent with the trustee’s overall investment strategy
• alignment with the trustee’s responsible investment beliefs
• income generation
• a contribution to the scheme’s interest rate hedge
• a diversified allocation across multiple areas of credit
• improved cost efficiency

Our approach

We began by delivering training to the trustee on the credit universe, introducing a broader range of credit opportunities, including asset-backed securities (ABS) and emerging market debt (EMD).

Working with the trustee, we then designed the building blocks for a new credit mandate. This included allocations to investment grade credit (the “matching” element of the portfolio) alongside ABS, EMD and high yield debt (the “growth” portfolio).

We ran a rigorous manager selection process, inviting nine managers to make proposals for different parts of the mandate. These managers were selected from LCP’s preferred managers for each asset class. Where appropriate, we asked managers to include model portfolios with their responses.

We conducted a detailed review of the proposals. Together with input from our research team on their view of each manager’s capabilities, we focused our review on:

• diversification and characteristics of the proposed portfolios
• sustainability approach
• fees

This process enabled us to shortlist five managers to present to the trustee. Ultimately, a single manager was appointed to deliver the full mandate on a segregated basis.

We then worked closely with the selected manager to develop bespoke investment guidelines aligned with the trustee’s objectives and beliefs. This included input from both our credit and responsible investment specialists. The agreed guidelines included:

• flexibility to adjust allocations within agreed limits based on market views
• pathway to reduce Scope 1 and 2 portfolio emissions over time, reaching net zero by 2050
• restrictions on investment in selected socially and environmentally sensitive issuers (eg controversial weapons)
• good governance safeguards, including restrictions on investment in issuers considered to have breached minimum standards under widely recognised global conventions (eg the Universal Declaration of Human Rights)
• a stewardship and escalation framework under which holdings falling outside the sustainability guidelines would be reviewed for issuer engagement (in the first instance) or divestment (if concerns were not addressed within a defined timeframe).

Key insights

We worked proactively with managers throughout the process to help them put forward the strongest possible proposals. As a result, one manager refined its approach to offer a segregated solution incorporating all of the credit exposures the trustee wanted within a single mandate.

Furthermore, following a recommendation from our responsible investment team, the manager incorporated the “good governance” restriction within the mandate guidelines, to reflect recognised minimum safeguards and widely accepted sustainability standards.

The outcome

An innovative, cost-efficient solution providing diversified exposure across multiple areas of credit, while supporting the trustee’s income, hedging, expected return and responsible investment requirements.

The value we added

By combining the expertise of our credit and responsible investment specialists, we helped the trustee develop a bespoke credit mandate aligned with its investment objectives and responsible investment beliefs. We also worked closely with the selected manager to translate those requirements into a practical solution that was efficient to implement.