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The hunt for yield with Spence & Partners' Brendan McLean

Nicholas Earl, 23/04/2021

Brendan McLean is head of manager research at Spence & Partners, a UK-based financial consulting firm which focuses on pensions, investments and risk management. Its seven offices, spread out across the country, are home to pension consultants, actuaries and administrators that look to provide solutions for trustees, members and employers.

In his role, he selects fund managers that he believes will appeal to the firm’s clients, working from a wide list of potential opportunities across passive and active strategies and multiple asset allocation. Alongside talking with fund managers, he is assisted by Mantle, an in-house risk modelling programme that assesses asset liability.

He has also risen to prominence as one of SharingAlpha's highest rated fund selectors.

As the economy enters the recovery period following the pandemic, Mr McLean believes that the primary issues for investors and fund managers have only been catalysed. Rather than revolutionising the asset management landscape, it has merely brought structural issues into increased focus, such as the prevailing low-yield environment.

This situation has only been heightened during this current period of instability and volatility across the investment landscape and global economy. Consequently, fund managers are looking for more creative solutions and the pandemic has only led to more unorthodox and exotic strategies.

He has noticed that, in the past 12 months, there have been more fund launches and strategies that have appealed to his smaller clients, which would previously have been considered too illiquid. He also noticed a shift towards open-ended structures.

Mr McLean explains: “I think the hunt for yield continues. Historically, higher yielding funds were less accessible but as clients and investors need return, new solutions are being provided to them in the form of more accessible, open ended funds. That way, clients don't have capital calls and distribution issues.”

Another example of an accelerated issue within the sector is the increasing complication of strategies as a consequence of the long-term rise of quantitative managers and investment strategies. Mr McLean suggests they are creating extra complexity just to find any source of income. As a result, there are more speciality finance funds being launched, while previously unpopular asset classes are becoming more topical, just to get any sorts of return.

Commenting on the rise of alternative solutions, he noted that while quantitative strategies have historically not performed well, he is finding more gems within that type of space, and that he was benefitting from the opportunity to find new funds launching that aren't as dependent on traditional sources of return. This is particularly the case in the pensions sector, where he has noticed an acceleration of the shift towards income. When referencing themes that appeal within the pension fund space, income has become vital as pension schemes have become even more cash-flow negative.

Outlining the views of fund managers that he communicates with, Mr McLean says: “I spoke to a manager today about their new fund, which is a fixed income fund, and it won't just harvest credit and duration returns. This is important because a lot of my clients are increasing their fixed income allocation as they de-risk due to improved funding levels. With the current low yielding environment , it'd be hard for them to get a suitable return. So more quantitative funds that extract different sources of return is an overlooked area at the moment.”

This is an interesting counter narrative in a market characterised by bullishness about economic growth and cyclical opportunities, as developed economies begin to leave a year-long period of social distancing. Mr McLean is sceptical of continued high performance from growth stocks and this is reflected in the position he takes in his role, and that is taken by Spence & Partners on the whole.

He says: “Everyone has sort of jumped on the bandwagon that things can only go up. Things can't go up forever and we try and take a more balanced approach. We do have funds that try to capture these higher beta growth plays, but we also have some that are more defensive.”

Continuing his bubble-bursting of popular themes that have captured the imagination of asset management reporting, he is also dubious about the idea of a return to the value and the rise in active strategies following the vast increase of sustainable strategies across the industry.

With a hint of weariness, he explains: “People have said value has been overdue for a comeback for many years. We would prefer to leave it to the active managers, and stay within passive equities. We wouldn't allocate to value factor funds at this stage, though.”

When it comes to sustainability and active management, he believes that ESG has gained popularity, but that sustainable themes such as the global energy transition remain concentrated in specific industries and companies, preventing widespread appeal. While Spence & Partners would only invest in managers that consider ESG, they don't necessarily allocate to sustainable companies and themes. Meanwhile, active management remain expensive.

He argues: “Passive funds with an ESG tilt do have tangible benefits – reduced carbon emissions are a good, easy example. I think it's a stepping stone on a client’s journey. Using ESG tilted funds is a good step, rather than changing from a passive fund into an active ESG mandate.”

This does not mean Mr McLean is unopposed to sustainability, and when questioned about the possibility of younger investors being more engage in ethical concerns of funds, he responds very positively, even if the shift can’t be observed closed pension schemes of older clients.

In his view, it was important that investment professionals engaged with issues concerning unethical business practices or questionable human rights records, a topic that will become increasingly important as greater asset flows pour into emerging markets.

He says: “We want managers to engage more with companies and policymakers to try and have change rather than to avoid a company or region altogether. We don't believe that exclusions are going to materially change things, you need to have a seat at the table.”

Brendan McLean is a contributor to SharingAlpha, and was interviewed by Fundeye as part of its series on the platform’s top fund managers and selectors

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