We use the same approach when analysing corporate non-financials and financials.
Schroders Credit wants to be the premium risk adjusted performance provider to our customers, and earn their trust. It is imperative that we anticipate, innovate and commit ourselves to research to identify opportunity and navigate risk in this highly competitive industry.
We believe resolutely in the importance of looking past short-term market noise and taking a forward-looking, fundamental research-led approach that emphasises understanding the business models of the issuers of credit, and the challenges they face in the real world that will ultimately determine the success, or weakness of their businesses.
Research is critical to our success.
Many of our competitors will place emphasis on macroeconomic drivers of the credit cycle to determine value and risk. Consequently, environmental, social and governance considerations have to be ‘bolted on’ to these processes. We see the world as a more complex ecosystem. For companies to flourish, they must anticipate multiple external forces shaping supply and demand. It is important to not only emphasise idiosyncratic research, but anticipate these external forces. We must use this understanding to contextualise research in a forward-looking way. We integrate E,S and G analysis into the very fabric of our approach and not just ‘bolt it on’.
Secular environmental and social/demographic issues are identified at a thematic level together with non-ESG related themes and provide our team of credit analysts with a forward-looking, non-market related, real world context through which they view fundamental credit analysis. We draw on granular information sources such as statistics on meteorological data or wage trajectories to determine how factors can impact issuers across countries or sectors. Analysts also work together closely to understand the knock-on effect across the supply chain – which we feel is an important feature as this is often the most under-researched.
Credit analysts will judge the potential for companies to adapt to changing secular themes and the effect on their cash-flows. We assess how companies are adapting by examining data around employee turnover, training budgets, changing product specifications due to environmental concerns at a security level yet which in our experience can have dramatic impacts on a company’s cash-flow, profitability and leverage.
Governance issues will tend to be more idiosyncratic than thematic in nature, and seen as a particularly critical part of our credit research. However, we seek to look beyond the conventional markers of perceived “good governance.” A strong business plan and philosophy, quality of management, indicators of management versus employee pay, diversity, employee retention and development, assessed through analysis of company data such as employee turnover, training budgets, etc. at the issuer level, help us to take a view on the credibility, future success and growth of the company and of course ability to meet creditor liabilities comfortably[GJ1] .
Analyst recommendations concentrate on these secular forces on demand and supply, and the implications for corporate cash-flows. The secular influences are what we call our credit ‘themes’, and incorporate the analysis of many environmental and social issues, recognising how acute environmental pressures, and social and political change will have significant impact on supply and demand within an investible horizon. Themes identify how the world is changing, and enable our credit analysts to determine how adaptable issuers are to change and in turn, the risks to cash-flows and bond-holder value. Environmental and Social themes (E&S) combine with non-ESG related themes to provide a forward-looking lens through which our analysts judge the sustainability of corporate cash-flows, while Governance (G) issues are critical to assessing idiosyncratic risk at a security level. As forward-looking investors who seek to deliver value to our customers, we will focus on improvements or deteriorations in these dynamics than just identifying ‘best in class’ based on snapshot metrics.
Moving from the analysis of ESG factors around the company, the last phase of research is determining intensity of ESG factor trajectories to individual company effects. Our researchers are tasked with identifying potential buckle points in a company’s business model or growth plan with timing and vector (direction and intensity). In many cases, the thematic analysis incorporates ESG perspectives, identifying companies who are benefitting from tailwinds to current business models from a number of secular phenomena. We find that a company’s business model that is anticipating/accommodating multiple sources of secular support gives us greater conviction the default risk will decline; such an assessment, if non-consensus, leads to the portfolio action of significantly overweighting such companies in our portfolios.
This research-led credit approach that integrates E,S and G is applied across a wide range of solutions, including global, regional, benchmarked, unconstrained, total return, income and absolute return.