Stellar performance from Sarasin’s sustainable bond portfolios

With Sarasin’s sustainable bond portfolios outperforming traditional bond portfolios by up to 500 basis points over the last 12 months, the advantages of a holistic approach to sustainability in the management of bond portfolios has become even more obvious in the current financial crisis. Sustainably operating companies are essentially less affected by the negative impacts of the financial crisis than those which do not operate sustainably. Persistently high credit spreads still present attractive opportunities for selective investments in high-quality issuers with a sustainable corporate profile.

The superior performance of and stellar returns from Bank Sarasin’s sustainable bond mandates during the financial crisis confirm the advantages of the sustainable investment style. This success is best explained by Sarasin’s farsighted decision to focus on issuers with a sustainable risk model and business model, and to underweight early many sectors and products that were among the biggest losers in the financial crisis. These include automobiles, fossil energy, basic commodities, and construction, as well as sub-segments such as investment banks and US mortgage providers. Due to our conservative investment policy, no investments in structured credit vehicles or illiquid credit derivatives were made at any time.

Sustainable investment philosophy reduces risks

Warren Buffet once said: “Only when the tide goes out do you discover who’s been swimming naked”. This is very true of many of the current developments on financial markets. In an environment of scarce liquidity, a collapse in market demand and a general sense of economic uncertainty, sustainable business management is increasingly proving to bring decisive competitive advantages for many sustainability leaders, and, conversely, disadvantages to non-sustainable businesses. The recent increase in bond market credit spreads illustrates that many companies have systematically overestimated their risk capacity in the boom years. The crisis has ruthlessly exposed the risks associated with non-sustainable enterprises, whose credit risk premiums in virtually every industry have risen far more sharply than those companies identified by Bank Sarasin as sustainability leaders over the years. The use of sustainability analysis as an additional risk filter has therefore not only effectively reduced risks for investors, but has also provided solid support for the performance and liquidity of their investments.

Attractive opportunities in the current market environment

In the current market environment, sustainable bonds offer an attractive opportunity for investors to combine more limited risks with high yield potential, which will pay off once economic activity recovers and credit spreads fall again. This is where the value-added created by the sustainable investment philosophy offered by Bank Sarasin for almost two decades is most clearly demonstrated. Beside the economic aspects, this investment style assesses the environmental and social impacts of companies and their business models.

For Bank Sarasin’s sustainable bond mandates the allocation of corporate bonds was increased beyond the previous target quota of around a third of the total fund volume (at the expense of other non-sustainable bonds, in particular government bonds). In addition, to reflect the current market situation, the portfolio might temporarily maintain an average credit rating below the existing “AA” minimum target. This allows for more flexibility in optimising the risk/return profile of bond mandates to accommodate changing market conditions.