Lionel When we talk to pension funds, our conversation often focuses on how the credit market has changed following the global financial crisis. Late last year, Mark Carney, Governor of the Bank of England pointed out that “Fundamentally, liquidity has become more scarce in secondary fixed income markets … the time to liquidate a given position is now seven times as long as in 2008, reflecting much smaller trade sizes in fixed income markets”. Not only do these conditions impact the time to trade, but also increase the cost of trading. Our own analysis suggests that an actively managed investment grade credit strategy with turnover of about 75% per annum will experience transaction costs of 0.40% while a passively managed strategy with about 20% annual turnover will incur transaction costs of 0.10%.

Faced with these statistics, pension funds are starting to look beyond the familiar active and passive investment grade credit strategies. Some are expanding into higher yielding areas of the credit market to be compensated for the extra cost, while others look to mitigate the impact of higher transaction costs by limiting turnover. A buy and maintain approach which experiences no turnover outside of reinvestment, can be expected to incur transaction costs of 0.05% in a year. We believe that in a low yield environment like the one in which we find ourselves in today, pension funds are attracted to this kind of approach.

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