What’s your role at Federated Hermes?
My role at Federated Hermes is Head of Sustainable Fixed Income and a portfolio manager on some of our sustainability-themed funds. Our team convert the principles of sustainability into investment solutions that make sense for our clients, of course, but also seek to deliver real world, positive outcomes.
How did you get started in your career?
My career is really one of two paths, you could say, but two paths that are now coming together very nicely. I started out in the NGO sector – I had some internships including one at the UN, I worked in international NGO, and I went to graduate school in New York City. From there, I worked at Moody’s, the credit rating agency, cut my teeth in credit and absolutely fell in love with leveraged finance and high yield. I worked many years there and then wanted to move to the buy side, which led me to Paris and then London in various roles as an analyst, as a PM, as a head of team and now as head of sustainable fixed income, which in many ways is bringing all of that together in a really satisfying way.
What do you enjoy the most about your current role?
What I enjoy most about my current role is unequivocally my team. They are an inspiring bunch to work with – ambitious, passionate, clever, forward thinking, opinionated, and hard working. They’re just a great bunch of people, and it inspires me every day. So that’s number one, but that’s in the context of an incredibly fascinating role. Sustainable investing is complexity on complexity. Investing is complex anyway, but layer on to that an additional investment objective around sustainability and it creates tension. It creates challenges in developing strategies that create financial returns and sustainable outcomes. These objectives don’t always speak to each other, so you have to navigate through that. Your investable universe is somewhat smaller, but you still have to create resilient portfolios that are strong and deliver performance through the cycle. It’s endlessly fascinating and challenging and always evolving. It’s great stuff.
How would you characterise your style as an investor?
My style as an investor is informed or governed by the kind of investment we’re doing, which is sustainable investing. So, it’s a bit more patient and I think disciplined, but also high conviction in sustainability and the process itself, and why I say ‘it’s the combination of all those things’ is that sustainability strategies will have tracking error versus mainstream indices. And so, in different periods of time during the year, you might see meaningful outperformance and think you’re a rock star, but it’s just the way the fund is structured – or, on the other side, you think you’ve got it all wrong because say for example, energy is rallying because of the oil price. Really, what matters is seeing through that and avoiding the mistakes, avoiding getting credits wrong and sticking with the conviction of the analysts, both on the sustainability and on the credit side, and ultimately delivering into this belief that the sustainability is self-reinforcing to financial performance because of structural change in the economy.
Sustainable investing is complexity on complexity. Investing is complex anyway, but layer on to that an additional investment objective around sustainability and it creates tension.
You’ve mentioned that sustainable investing is complex. When you’re considering making an investment, what key metrics or attributes do you look for the most?
First, no number alone informs enough in any decision – it’s also important to consider how those numbers travel over time. I think within sustainable investing we are looking at three factors. The first is risk – that’s credit and market risk – the second is valuations, and the third is sustainability. So, let’s pick apart each of those. On the credit risk side, having been a credit analyst for many years there are some ratios that I love. I love FFO (funds from operations) to net debt, free cash flow to net debt and I love an old school one: operating income over total assets. All of this is to capture the cash-generative properties of a company. From a valuation point of view, of course, relative value is within the sector, among peers, but also within the capital structure itself. So senior versus sub, or term structure, 10-year, five-year versus 30 for example. All those are important metrics from a relative value point of view.
Sustainability is tricky to implement as one metric across all names. The key here is the principle: where and how does a company attach itself in a relevant way to environmental and social factors? Where’s the materiality? Is the company aware of it and what are they doing about it, and how does that affect the financials of the company? All of this, based on what I’ve come to see in the years of doing this job, is wrapped around governance. Governance sits at the centre of everything. Governance doesn’t guarantee sustainability, but it’s required for it. At the same time, if you look at your tail risk where companies fail, they tend to be poorly governed companies. So that is essential in all these factors that I’ve discussed.
Same question as above but for exits from the portfolio: What would trigger a sale or an exit of a holding?
What triggers a sale in a portfolio is, in principle, the same thing that would trigger a buy. We’ve got frameworks, we’ve got structure and it’s how the total of the scores around a company itself add up, for lack of a better word – and that’s where the tension is really interesting. So, for example, a company is a good credit, it has pretty good value, but perhaps it doesn’t have the sustainability aspects that work for our sustainability-themed funds. But maybe the name could work for some of our other funds. So those scores really drive everything in there.
But on the other side of that, from a top-down point of view, what drives decisions around region, currency and sector would be our top-down strategy meetings. We need to have the ability to respond quickly when news breaks. And so, clearly, we’re having ad hoc discussions straight away when there’s news, discussions between analysts and portfolio managers. But we have a regular cycle of meetings where we initiate names and a credit analyst and the sustainability analyst will present a company, there’s a discussion, scores are made, they’re ratified, and it’s game on after that.
What are the strengths of the credit team?
I think it’s the fact that we have a dedicated, sustainable fixed income team that sits within the broad global fixed income group on a global basis. We’ve got a team in London, and we’ve got a team in Pittsburgh, and the reason we’ve done this is because our approach to sustainable investing is very similar to the way we invest from a financial risk point of view. It’s forward looking and forward-looking analysis is necessarily qualitative. That’s why we’ve hired the team that’s integrated with our analysts or credit analysts. But the essential factor is that the view on sustainability and the assessment of sustainability credentials is independent. That gives it credibility and integrity. So, in other words, a portfolio manager or an analyst could really love a name because it’s super cheap, but it can’t go into the sustainability-themed funds unless there’s a perception that it fits, that it works from a sustainability point of view. So that’s why you need people, and that’s why you need this independent view of the sustainability credentials.
What is the current state of play between ESG and sustainable investing?
Let’s delineate the one from the other. So ESG investing is, in my view, the integration of non-fundamental factors into the investment process, so understanding and pricing in those factors in so far as they affect the risk of a company. Sustainability goes the other way. To what extent does where a company operates, or the products that it creates, or the services that it provides, have an effect on society or the environment? So, there’s some nuance and I think perhaps there is some ESG fatigue in the market. I think that’s really just at the surface, this is really something where the nomenclature is struggling to find its home. It’s notable that, increasingly, companies behave absolutely in line with this concept of sustainability. They do this because they understand that there is structural change in the economy driven by regulation, consumer preferences, shifting value chains and all this is to mitigate the systemic risk of climate change and biodiversity loss. Would you want to call it ESG? Would you want to call it sustainability? Companies are responding, but the economic reality remains absolutely the same through this evolution of terminology.
What are your interests out of work?
I’m in the waning six months of completing a master’s degree, so that’s consuming everything. So, it’s about balancing family first, work and the master’s program, which is taking a little time away from fiddling around on my guitar! And to keep mentally sane, I love running, swimming and biking just to stay fit.
To meet more of our managers, please explore the ‘Meet the Manager’ hub.
To find out more about our sustainable fixed income offering, please explore our SFI landing page.
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