INVESTMENT DISCOVERIES Building a new playing field with smaller issuers So like an R&D lab, we did a series of tests. We Janet Rilling, CFA looked for ways to improve both the benchmark and Senior Portfolio Manager, the portfolio. We focused our efforts on a part of Head of Multi Sector – Plus, the market where we have historically found good Global Fixed Income investment ideas—companies that issue smaller amounts of debt and are generally under-followed. To find better opportunities, sometimes you have to We also drew on our niche as a credit-focused, think bigger than the playing field you’ve been given. bottom-up investment manager. Our research team helps us identify attractive investment candidates. My team was working on several fixed-income Our modest asset size allows us to source enough projects, including one to improve a passive retirement plan strategy and another to help of these small issuers’ bonds to make a difference in our portfolios. For a larger manager, finding pension clients improve the diversification in their enough of these types of bonds to be impactful can long-duration credit mandates. Despite a variety be a challenge. Further, if enough are found, a large of cases, we noticed a pattern—a linked set of manager’s share of the company’s outstanding debt challenges due to the very nature of the bond may be too large, a condition often precluded by markets. In a nutshell, existing fixed-income indices client guidelines. exhibit a degree of concentration. For a pension plan that is striving to match its assets to its With these ideas in mind, we built a new index—the liabilities, such concentration introduces undesirable Wells Fargo Small Issuer Long Credit (SILC) Index. idiosyncratic risk. We started with the constituents of the standard benchmark for pension funds—the Long Credit As we dug deeper, we identified three common obstacles that U.S. pension plans face: Index. Our innovation: Remove the largest 10% of issuers Credit indices are concentrated in from the Long Credit Index 10% 1 “mega” issuers. In fact, the top 10% of the issuers make up about 50% of the Create an Bloomberg Barclays U.S. Long Credit index with the 90% Index (Long Credit Index). remaining 90% of issuers 2 Large issuers may seem like a safer bet because of their size and liquidity, but size does not necessarily equal safety. Despite this change, the characteristics of our SILC Index still closely resembled the Long Credit Index across all relevant factors: duration, credit Many large asset managers tend to focus quality, yield, and industry type. But, importantly, 3 their portfolios on these largest issuers, the enhancement removed exposure to the largest compounding the concentration. issuers that pension plans already tend to have a lot of exposure to. 13 2020