Simon Cooke, portfolio manager at Insight Investment and manager of the BNY
Mellon Responsible Horizons EM Debt Impact Fund, offers insights into the evolution and
impact of the asset manager’s emerging market debt fund.
BNY Mellon Investment Management launched the Responsible Horizons Emerging Market
Debt Impact Fund in 2023, managed by Insight Investment, an arm of the BNY Group. The
fund – classified as Article 9 under the EU’s Sustainable Finance Disclosure Regulation
(SFDR) – focuses on emerging market bonds that aim to deliver both financial returns and
positive environmental or social impacts.
Managed by Simon Cooke, the Ireland-domiciled fund aligns its investments with the UN
Sustainable Development Goals and the EU taxonomy, focusing on themes like people,
planet and prosperity.In the 12 months, to April 2024, the accumulation share class of the fund returned 7.1%
based on net asset value, including charges but excluding the initial charge, and income
reinvested gross of tax. Outperforming the benchmark index by more than 2.3%, those gains overcame the negative effects the fund’s performance experienced during its initial
investment period immediately after launch. “Market conditions at that time were challenging and we identified it as being notably expensive,” says Cooke.
“Market conditions at that time were challenging and we identified it as being notably expensive.”
Credit decisions
The fund yields 6.8% compared to the benchmark index of 6.0% and is invested across
approximately 80 issuers, with an average credit rating of BBB. The benchmark index is the
JP Morgan EM Credit Green, Social and Sustainability Diversified Index (USD Hedged).
Since the fund launched in January 2023, the USD W accumulation share class has returned 4.7% annualised, versus the performance benchmark return of 4.4% annualised.
According to Cooke: “The thrust of our approach is to seek to achieve the bulk of financial
outperformance from credit decisions. Depending upon the environment and market
conditions, these include decisions on market, country, sector allocations as well as individual issuers and securities.”
He notes that the credit decisions have positively contributed to returns relative to the
benchmark in each calendar quarter from March 2023 onwards. “We generally only seek a
modest contribution to outperformance from taking views on non-credit views such as
duration views and currency – these have been largely flat over time.”
The asset manager aims to assign key performance indicators for each holding to measure
impact over time, recognising that this data takes time to accumulate and assimilate. As of the end of December 2023, impact reports for bonds issued more than 12 months ago cover just over 58% of the fund, though coverage is expected to grow over time.
Expanding impact universe
The funds included for a competitor comparison are primarily Article 9 or Article 8 funds, he
shares, highlighting that the team expects to hold issues for three to five years on the basis
that it may take time for the achievable added value to crystallise.
“It may also take time for the impact that we expect the issuer to generate to be seen and felt where it is intended,” Cooke adds.
The emerging market impact universe has expanded by about 20% annually. Consequently,
the fund has grown from 50 to around 80 holdings.
Cooke has witnessed new types of impact issuance; the first green steel bond, as well as the first lithium, ‘blue’ and gender-equality bonds. Over the course of the year, that has allowed the team to achieve allocations that gain coverage of all 17 of the UN Sustainable
Development Goals. The fund is required to invest at least 50% of its net asset value (NAV)
in impact bonds where the proceeds are specified to be used for a positive environmental or social impact. The remainder will be invested in impact issuers or improving issuers.
“Further, we invest at least 80% of NAV in issuers that meet the sustainable investment
criteria under SFDR and exclude issuers participating in activities harmful from an
environmental or social perspective,” says Cooke.
“It may also take time for the impact that we expect the issuer to generate to be seen and felt where it is intended.”
Data suggests that for every $1 million invested, the fund helped improve greenhouse gas
emissions by avoiding 284 metric tons of CO2e annually. This would be equivalent to
removing 63 cars from the road, according to the US Environmental Protection Agency.
Some successes include investments in a green bond supporting the circular economy through sustainable forestry management and circular economy products and processes. To support SDG 7 – a goal aimed at ensuring access to sustainable energy – the fund includes a company generating geothermal energy in coal-dependent Indonesia, says Cooke. Additionally, Cooke shares that in support of SDG 14 (life below water), a blue bond from a Korean issuer supports sustainable marine transportation, aligning with international regulations and Korea’s clean marine objectives.
Improving fundamentals
“Yields close to decade highs represent an attractive opportunity in our view despite the
potential for some spread widening in the short term,” he highlights. “We see the backdrop of falling inflation, resilient growth and peak US rates as supportive for risk assets in the short to medium term, while emerging markets also offer potentially accelerating relative growth prospects, monetary easing and improving corporate fundamentals.”
The fund manager envisages two primary structural impact opportunities within emerging
markets over the next three to five years: building renewable energy generation and telecoms infrastructure. The geopolitical events of the past year have been concentrated in a tiny minority of emerging market countries, he says.
Emerging market growth is outperforming developed market growth at the fastest pace in a decade (IMF: April 2024), Cooke cites, with some influential central banks in emerging
markets such as Brazil, easing well ahead of their developed market counterparts, creating a supportive macro backdrop. Insight’s institutional process evaluates factors impacting a
country’s macroeconomic outlook, positioning issuers benefiting from growth while avoiding
those in deteriorating environments.
