Winnersrationale

Helping clients achieve chunky yields on the bond portion of their portfolios while pushing issuers to embrace sustainability and boost corporate governance is no mean feat. But that is exactly what Federated Hermes has achieved with its SDG Engagement High Yield Credit Fund.

The fund, which was launched in October 2019, seeks to incorporate the United Nations Sustainable Development Goals around worldwide prosperity and environmental integrity as a basis for engagement with issuers in global high-yield bonds. The approach is based on the portfolio managers’ belief that the high-yield market is ripe with engagement opportunities and provides the possibility of producing positive change, because many high-yield issuers are yet to seriously focus on these issues.

Federated Hermes view is that such engagement will boost the long-term performance of these companies, resulting in alpha for investors.

To go about this, the investment manager relies on a small army of dedicated fixed-income engagers and stewardship professionals to reach out to target companies on issues ranging from climate change to diversity, with the aim of achieving a positive outcome. Hundreds of such engagement actions have already been carried out, with robust progress made in environmental and social factors in particular.

In terms of asset selection, the fund has sought out opportunities in areas such as raw materials, suppliers, logistics and distribution. Each portfolio company is required to meet certain investment and engagement criteria, while having cash-generative operations and an attractive valuation.

That approach has helped the fund to deliver a strong performance since its inception. In the 12 months to 31 July — the timeline provided for awards submissions — the fund grew by 10.05% in dollar terms versus 10.39% for the ICE Bank of America Merrill Lynch Global High-Yield Constrained index, a high-yield index that is not focused on ESG. On a calendar year basis, SDG Engagement High Yield Credit Fund returned 7.13% in 2020 compared to 6.47% for the benchmark.

The fund’s managers have demonstrated they have no qualms divesting from issuers that are judged to have insufficiently responded to engagement. In 2020, the fund exited its position in Japanese technology conglomerate SoftBank based on deemed weaknesses in its risk oversight and an unwillingness to implement changes in governance.

Federated Hermes is Asian Private Banker’s Best Fund Provider – ESG/Sustainable Bond.