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Credit Market Themes in 5 Charts

Three quarters through an unusually volatile year, here are some key themes in global credit markets. We review the current market environment for bonds and describe how we are defensively positioned against rising rates while finding opportunities amidst the volatility.

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Value vs. Values

The Evolution of ESG Considerations for Pension Plan Investments

Over the past several years, pension funds have been thrust into the center of the ESG debate due to the influence they have on the actions and practices of large corporations as large stewards of capital. In our article published in The Observer by the Association of Canadian Pension Management (ACPM), we highlight the spectrum of approaches that Plans have taken and how ESG integration complements – rather than compromises on – investment performance.

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The Hurdles Facing Foundations Have Never Been Higher

Responding to a higher disbursement obligation in a lower return environment

In light of the Government of Canada's decision to increase the disbursement quota for foundations, we believe foundation executives and trustees should look to “Active Credit” to improve the return potential of their fixed income allocation.

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Cover of The Hurdles Facing Foundations Have Never Been Higher document
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RPIA Develops a Bespoke Fossil Fuel Exclusion Strategy for Institutional Investors

We are pleased to announce the launch of our new strategy, RP Broad Corporate Bond (Fossil Fuel Exclusion), designed in partnership with our client, University of Toronto Asset Management (UTAM), and in collaboration with FTSE Russell. Learn more about the strategy and how the first-of-its-kind screening approach was developed!

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What Should An Allocator Do With Their Core Bond Portfolio?

Faced with a challenging return environment, pension and endowment investors are presented with some difficult choices. We believe that a thoughtful unbundling of the fixed income allocation can help investors preserve liquidity needs and generate more income than a traditional core allocation without increasing portfolio risk.

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Our Solutions

Our Solutions

We serve a broad range of investors through a variety of solutions catering to their unique investment goals. We apply our differentiated active skillset in all our strategies, which vary from low-risk to higher-risk. Although our toolkit and risk/return levels vary across our suite of products, our credit expertise, proprietary technology, and rigorous risk management is applied throughout. We have collaborated closely with institutional investors in developing several of our strategies to ensure that the portfolio mandate aligns with their long-term investment objectives.

RPIA Develops a Bespoke Fossil Fuel Exclusion Strategy for Institutional Investors

RPIA Develops Carbon-Reduced Fixed Income Solution

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Investment Process

Investment Process

RPIA's approach is to apply a highly active, dynamic investment process that enables us to consistently extract value from the global credit market, driven by security selection. Investors do not need to compromise on credit quality or sacrifice liquidity to improve their portfolio returns. Our active approach can be distilled into four steps:

1. The Investment Committee uses their expertise and experience to collaborate and identify a key theme based on prevailing macroeconomic conditions.

2. The Credit Research Team conducts deep-dive research to determine the most compelling issuer, drawing from their knowledge of the sectors each team member covers.

3. We utilize our proprietary technology and expertise to identify the most attractively priced bond within that issuer's capital structure

4. The Portfolio Management Team sizes the position accordingly within the strategy based on factors such as conviction level, existing exposures, and liquidity considerations to name a few.

The entire process is overseen by our independent Risk Management Team and Committee who analyze policy constraints, stress testing, and concentrations across strategies.

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Our Strategies

Our Strategies

RPIA offers a range of investment strategies reflecting our investors' diverse risk and return objectives. Our flagship institutional long-only strategy is RP Broad Corporate Bond, which has evolved into a suite of strategies for specific goals in collaboration with investors. In addition to our institutional-focused mandates, we also offer absolute return-focused strategies.

1. Long-Only Strategies

  • RP Broad Corporate Bond
  • RP Broad Corporate Bond (BBB, Carbon-Reduced)
  • RP Broad Corporate Bond (Fossil Fuel Exclusion)

2. Alternative Credit & Fixed Income

  • RP Debt Opportunities
  • RP Select Opportunities
  • RP Fixed Income Plus

3. Mutual Funds

  • RP Strategic Income Plus Fund
  • RP Alternative Global Bond Fund
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ESG

ESG

RPIA considers Environmental, Social, and Governance ("ESG") factors when making investment decisions for all the strategies we manage. When we include these factors alongside traditional financial metrics, we can think more broadly about risk and make more prudent investment decisions. In other words, it is in the best interests of our investors to integrate ESG into our process. Through our in-depth credit research, we are in regular communication with the management teams of the issuers in which we invest. We have also partnered with an institutional investor to design a strategy that targets specific ESG outcomes and, in this case, an Environmental outcome. We have been a signatory to UN PRI since 2018 and have several other industry memberships ( learn more).

Download Our ESG Policy Read Our 2021 Sustainability Report

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Explore Our Funds

RP Broad Corporate Bond

This actively managed credit strategy's primary objective is to outperform the FTSE Canada All Corporate Bond Index net of fees in a risk-controlled manner. The strategy aims to add value through superior credit selection across global credit markets and avoid uncompensated interest rate risk by remaining duration-neutral versus the benchmark.

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RP Broad Corporate Bond (BBB, Fossil Fuel Exclusion)

An actively managed credit strategy whose primary objective is to outperform the FTSE Canada Corporate BBB Index net of fees by 100 bps on an annualized basis. The strategy extends on our longstanding Broad Corporate Bond investment process by including explicit ESG targets. Investments in tobacco and munitions are prohibited, and the strategy aims to keep the carbon intensity at least 30% lower than the index.

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RP Broad Corporate Bond (Fossil Fuel Exclusion)

An actively managed credit strategy with the primary objective of outperforming the FTSE Canada All Corporate Ex Fossil Fuels Enhanced Bond Index by 100 bps (net of fees) on an annualized basis. The strategy merges our long-standing investment process with a transparent, rules-based approach to screening fossil fuel exposure out of the portfolio.

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Market Commentary

Is the "Greenium" Dead?

May, 2022

In the earlier stages of the ESG-linked bond market, we saw issuers given a significant advantage when issuing a Green, Social or Sustainable bond compared to their conventional corporate bonds. Essentially, these ESG-labeled bonds are issued at higher prices than traditional bonds and have lower yields, simply because of the ESG label on the bond. This lower spread at issuance was attributed mainly to low supply and high demand as new ESG-dedicated fixed income funds competed for a finite, albeit growing, number of ESG-labeled instruments while also building their dedicated fund offerings.

In 2019 and 2020, an issuer could save 10 or more basis points (bps) in interest cost by issuing an ESG-labeled bond instead of conventional debt (a large discount on $500M to $1B in borrowing). This cost advantage became known as a "greenium." Some investors (including ourselves) were concerned about whether the size of the discount was warranted relative to how impactful the use of proceeds would be on actual ESG issues. Green and Social bonds often have long lookback periods, allowing issuers to finance past projects that were already part of the businesses' plans even before the advent of ESG-labeled debt. While we applauded the increasing focus on Environmental and Social projects, we questioned whether some issuers were simply funding business as usual activities but gaining a cost advantage simply through a label.

Growth of ESG Bond Market

Source: Bloomberg

As the ESG bond market has grown, we have seen the "greenium" evaporate in many deals, thus eliminating the funding advantage borrowers have had in previous years, receiving favourable treatment by the markets with better pricing and lower rates. As highlighted below, we have seen US investment grade issuers go from a nearly 20 bps funding advantage in 2020 to an under 5 bps funding advantage this year. European ESG bond markets are more mature and actually posted zero cost savings in 2022, a far cry from the over 10 bps advantage seen in 2019. 

Graph showing the decline of the

Source: Goldman Sachs Global Investment Research

The diminishing "greenium" is a welcome trend in our view! We believe this trend represents the maturing nature of the ESG labeled bond market, where issuers only gain a cost advantage on the ambition of their ESG bond issuance rather than the label. We believe this is a key development in ensuring the longevity and credibility of ESG bond markets, allowing managers to express views on issuers either through conventional or ESG debt without causing large pricing discrepancies. This can also be a case for Sustainability Linked Bonds (SLBs), which incentivize improvements in a company's ESG profile, bringing the focus back to ambition over labeling.

The structuring of ESG bonds is also maturing thanks to ongoing feedback and collaboration from investors. Issuers are now actively addressing "greenwashing" claims by embedding incrementality into their ESG bond issuance. This ensures that proceeds are used to fund new projects/activities rather than financing "business-as-usual" operations. For example, to avoid the lookback periods mentioned above, we have seen new issues from the likes of Bank of America and Honda whose use of proceeds will be 100% dedicated to new projects rather than financing preexisting projects.

As the ESG debt market matures, we look forward to increasing credibility within the marketplace where issuers utilize these structures to target true impact. Only then can the dialogue move from "greenwashing-or-not" to "how can we allocate investment dollars to the most impactful ESG bonds."

 

 

 

 

Important Information

The information herein is presented by RP Investment Advisors LP (“RPIA”) and is for informational purposes only. It does not provide financial, legal, accounting, tax, investment, or other advice and should not be acted or relied upon in that regard without seeking the appropriate professional advice. The information is drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does RPIA assume any responsibility or liability whatsoever. The information provided may be subject to change and RPIA does not undertake any obligation to communicate revisions or updates to the information presented. Unless otherwise stated, the source for all information is RPIA. The information presented does not form the basis of any offer or solicitation for the purchase or sale of securities. Products and services of RPIA are only available in jurisdictions where they may be lawfully offered and to investors who qualify under the applicable regulation. RPIA managed strategies and funds carry the risk of financial loss. Performance is not guaranteed and past performance may not be repeated. “Forward-Looking” statements are based on assumptions made by RPIA regarding its opinion and investment strategies in certain market conditions and are subject to a number of mitigating factors. Economic and market conditions may change, which may materially impact actual future events and as a result RPIA’s views, the success of RPIA’s intended strategies as well as its actual course of conduct. RPIA’s ESG integration into its portfolio management function is subject to varying internal policies, and may be revised as a result of external market and economic factors, as well as strategic internal portfolio management decisions and the investment objectives and strategies of the relevant RPIA managed strategies and funds.

 

 

ESG Articles

Is the "Greenium" Dead?

May, 2022

In the earlier stages of the ESG-linked bond market, we saw issuers given a significant advantage when issuing a Green, Social or Sustainable bond compared to their conventional corporate bonds. Essentially, these ESG-labeled bonds are issued at higher prices than traditional bonds and have lower yields, simply because of the ESG label on the bond. This lower spread at issuance was attributed mainly to low supply and high demand as new ESG-dedicated fixed income funds competed for a finite, albeit growing, number of ESG-labeled instruments while also building their dedicated fund offerings.

In 2019 and 2020, an issuer could save 10 or more basis points (bps) in interest cost by issuing an ESG-labeled bond instead of conventional debt (a large discount on $500M to $1B in borrowing). This cost advantage became known as a "greenium." Some investors (including ourselves) were concerned about whether the size of the discount was warranted relative to how impactful the use of proceeds would be on actual ESG issues. Green and Social bonds often have long lookback periods, allowing issuers to finance past projects that were already part of the businesses' plans even before the advent of ESG-labeled debt. While we applauded the increasing focus on Environmental and Social projects, we questioned whether some issuers were simply funding business as usual activities but gaining a cost advantage simply through a label.

Growth of ESG Bond Market

Source: Bloomberg

As the ESG bond market has grown, we have seen the "greenium" evaporate in many deals, thus eliminating the funding advantage borrowers have had in previous years, receiving favourable treatment by the markets with better pricing and lower rates. As highlighted below, we have seen US investment grade issuers go from a nearly 20 bps funding advantage in 2020 to an under 5 bps funding advantage this year. European ESG bond markets are more mature and actually posted zero cost savings in 2022, a far cry from the over 10 bps advantage seen in 2019. 

Graph showing the decline of the

Source: Goldman Sachs Global Investment Research

The diminishing "greenium" is a welcome trend in our view! We believe this trend represents the maturing nature of the ESG labeled bond market, where issuers only gain a cost advantage on the ambition of their ESG bond issuance rather than the label. We believe this is a key development in ensuring the longevity and credibility of ESG bond markets, allowing managers to express views on issuers either through conventional or ESG debt without causing large pricing discrepancies. This can also be a case for Sustainability Linked Bonds (SLBs), which incentivize improvements in a company's ESG profile, bringing the focus back to ambition over labeling.

The structuring of ESG bonds is also maturing thanks to ongoing feedback and collaboration from investors. Issuers are now actively addressing "greenwashing" claims by embedding incrementality into their ESG bond issuance. This ensures that proceeds are used to fund new projects/activities rather than financing "business-as-usual" operations. For example, to avoid the lookback periods mentioned above, we have seen new issues from the likes of Bank of America and Honda whose use of proceeds will be 100% dedicated to new projects rather than financing preexisting projects.

As the ESG debt market matures, we look forward to increasing credibility within the marketplace where issuers utilize these structures to target true impact. Only then can the dialogue move from "greenwashing-or-not" to "how can we allocate investment dollars to the most impactful ESG bonds."

 

 

 

 

Important Information

The information herein is presented by RP Investment Advisors LP (“RPIA”) and is for informational purposes only. It does not provide financial, legal, accounting, tax, investment, or other advice and should not be acted or relied upon in that regard without seeking the appropriate professional advice. The information is drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does RPIA assume any responsibility or liability whatsoever. The information provided may be subject to change and RPIA does not undertake any obligation to communicate revisions or updates to the information presented. Unless otherwise stated, the source for all information is RPIA. The information presented does not form the basis of any offer or solicitation for the purchase or sale of securities. Products and services of RPIA are only available in jurisdictions where they may be lawfully offered and to investors who qualify under the applicable regulation. RPIA managed strategies and funds carry the risk of financial loss. Performance is not guaranteed and past performance may not be repeated. “Forward-Looking” statements are based on assumptions made by RPIA regarding its opinion and investment strategies in certain market conditions and are subject to a number of mitigating factors. Economic and market conditions may change, which may materially impact actual future events and as a result RPIA’s views, the success of RPIA’s intended strategies as well as its actual course of conduct. RPIA’s ESG integration into its portfolio management function is subject to varying internal policies, and may be revised as a result of external market and economic factors, as well as strategic internal portfolio management decisions and the investment objectives and strategies of the relevant RPIA managed strategies and funds.

 

 

Relationship Team

 
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Principal, Co-Head of Client Portfolio Management

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Principal, Co-Head of Client Portfolio Management

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Principal & Director, Client Portfolio Management

 
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Vice President, Client Portfolio Management