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We believe that pension schemes can better align their assets and liabilities with a buy and maintain approach to credit investing. This approach helps investors avoid the usual pitfalls of benchmark investing by reducing transaction costs and reinvestment risks.
This credit strategy seeks to provide a better alignment of assets and liabilities than more traditional benchmark investment styles. This results in a more focused credit risk management approach and an attractive proposition for long term investors such as pension schemes and insurance companies. It is an ideal building block for a portfolio with a long-term horizon and complements other strategies focused on alternative income and liability driven investment.
As the asset management arm of one of the United Kingdom’s largest insurance companies and an institutional investor in our own right, we have unparalleled experience in developing and managing buy and maintain credit strategies. Long-term investors can benefit from this extensive experience we’ve gained from managing Aviva’s annuity book and our detailed understanding of managing pension fund assets, including £36.7 billion of buy and maintain credit strategies.1
At Aviva Investors we aim to deliver a credit premium that meets the client’s return expectations over a defined investment horizon by investing in defensive assets with the intention to hold until maturity. This approach emphasises long-term credit fundamentals coupled with broad diversification principles to identify assets within the global investment grade credit universe (public and private debt) which we believe will deliver a better credit loss experience for the end investor.
We can deliver a broad range of tailored credit strategies to meet each client’s specific objectives and requirements. They can complement traditional fixed income mandates or form part of a wider liability-aware strategy.
Why Aviva Investors for buy and maintain credit?
a. Longer duration: Our approach to structure benchmark agnostic buy and maintain mandates allow us to extend from typical credit duration of 7 – 9 years to 13 – 14 years. This means that the re-investment risk can be significantly reduced.
b. Benchmark agnostic approach to global diversification: We believe that diversification originates from the location of a company and its business activities and not from the currency of the bond investment or its weighting in a market index. Accordingly, for a UK client with GBP liabilities we would only invest in non-GBP bonds if there is a clear benefit to the client in terms of added diversification or better value.
c. Use of private placements: In addition to global public bond markets, we would also selectively invest in high quality GBP private placements to enhance diversification and lock-in attractive valuations where possible. Private placements allow for a broader name diversification (to complement publicly traded bonds) and is likely to exhibit better ex post credit experience from their structural advantages (e.g. covenants).
d. Use of cross-currency swaps: For a UK liability owner, we consider cross currency swaps as the most appropriate hedge for long-term buy and maintain investments. These long term hedges are more efficient and cheaper, as they avoid constant portfolio rebalancing (that will be required if FX forwards are used).
e. Use of Credit Default Swaps: On rare occasions we would also use CDS for risk management purposes to protect capital in extreme illiquid market conditions.
1 As at 30 September 2016