Mitch Reznick and Fraser Lundie have just reached a milestone – they have been working together “in various forms” for 10 years now.
Having met at Fortis Investments, they are currently co-heads of credit at Hermes Fund Managers, which they joined in February 2010.
Mr Reznick’s career has taken him from New York to Paris – where he met his working partner – and eventually London. Glasgow-born Mr Lundie moved from Scotland to take up a role at Fortis in Paris, before heading to London. Both managers had plotted a career in fund management.
The well-travelled pair is now settled it would seem, with Mr Lundie based in south London with his family and American Mr Reznick a fully fledged British citizen. They recall a taxi ride during a stay in New York when the driver questioned whether Mr Reznick was English.
By the time they left Fortis, Mr Reznick was co-head of credit research for the global team and Mr Lundie a high-yield portfolio manager.
During their time at Fortis, the company purchased ABN Amro and was then itself bought by BNP Paribas, which prompted several reorganisations of the credit business, according to Mr Lundie.
He explains: “From my side, the push factor away from Fortis was that because of that integration of Fortis into BNP Paribas Asset Management, my choice was to continue in my current job but move back to Paris and for family reasons I didn’t want to do that.
“More importantly the pull factor of coming to Hermes was the opportunity to be able to run credit mandates in a way Mitch and I thought was the way forward, given the structural change that was happening to the market.”
He refers to the opportunity presented by Hermes as a “blank sheet of paper” in terms of mandate flexibility. “To be able to go somewhere in 2010 straight after the financial crisis and say, ‘We need mandates that are going to fit the structural change that is taking place in our market’, perhaps you wouldn’t have been able to instigate those types of changes at a place like Fortis,” suggests Mr Lundie.
The Hermes Global High Yield Bond fund is the pair’s longest-standing Ucits fund with a four-year track record. The fund is top quartile across one and three years in the IMA Global Bonds sector, according to FE Analytics. Mr Lundie attributes this outperformance to unconstrained credit investing, mandate flexibility and their global approach.
“Now we have been able to take that a stage further with the launch of the Hermes Multi Strategy Credit fund, which launched on May 1,” observes Mr Lundie. “That is taking the whole idea of unconstrained credit investing to achieve the best risk-adjusted return to another stage because not only can we invest in a global market but this is looking to have more of an emphasis on dampening volatility and protecting the downside.”
The new fund will target a 7 per cent annualised return through the market cycle and aims to generate positive absolute returns on a rolling 12-month basis. Raphael Muller, a senior credit portfolio manager at Hermes, joined Mr Lundie in running the fund. They have been managing the strategy on which the fund is based since June 2013.
The portfolio launched with assets of $242.1m (£144m). Up until now the Multi Strategy Credit fund has been run exclusively for the BT pension scheme, so the launch marks the first time it has been open to investors in Ucits format.
Mr Lundie remarks: “The profile that it’s trying to achieve – which is high-yield-like returns but with significantly better volatility and downside protection – that hits a real sweet spot for what a lot of different people are trying to achieve right now in terms of their credit allocation.”
Mr Lundie and Mr Reznick consider the new fund to be the “culmination of our philosophy and process that we have been running for the past 10 years”. It’s an approach to credit management that they believe is far from traditional and while Mr Lundie admits that educating investors about their approach has taken a little longer than they thought, he adds they are “getting there”.
“For example, in high yield people generally perceive avoiding default risk the number one risk in the market, whereas we put as much emphasis on security selection as company selection because we’re managing other risks now,” he explains.
“What’s been good for us over recent years is those other risks have become really prevalent and have been dragging total return in high yield, so our ability to manage things like duration, while at the same time making sure we’re in solid companies, has been great return-wise; it’s been a challenge in terms of explaining to people who have spent however many years listening to people talk about companies, not securities.”
Mr Reznick says this approach to credit investing requires a team of analysts that understands how to price all the risks across the various securities. “Their job, as much as it is [about] assessing risks, it’s also [about] pricing risk through everything and importantly through securities,” he says. “We’ve got so much intellectual capital to understand in credit – so we endeavour to express the view in one way or another, so it’s not just ‘buy the bonds, don’t buy the bonds’. It’s ‘this is what I think about the credit’. There are all these different ways to invest and we need to find the way that makes sense, so in that way it’s a pretty efficient investment process.”
Mr Reznick notes that it is a rare skill set to find among analysts but it has not stopped the pair from building a capable team.
“We need to have a team where there is full buy-in and desire to take risks, which means that research analysts need to think like portfolio managers and vice versa. It’s part of the reason why we all sit on the same desk,” explains Mr Lundie. “So it’s very far away from the traditional way of setting up a credit management desk. We all need to understand each other’s jobs in order to come to the same decision and have collective buy-in.”
When asked whether investors can expect any further fund launches from the credit team, Mr Lundie states there will be nothing new during the rest of this year. Mr Reznick continues: “But you will see more from us over time. Without revealing too much we see a product life curve. Just as this Multi Strategy Credit fund was in an incubation period and it was launched, in time we’ll see other products jump onto the growth curve.”
“That said, this is not a product for today and not for tomorrow,” adds his partner. “We fully expect to see multi strategy be a relevant allocation just like global high yield in five years’ time and 10 years’ time.”
There is no doubt the duo is committed to educating investors about its approach to credit management and excited to be able to get its latest fund out to the market. The pair acknowledges that external recognition is important to them.
“It’s partly because we’re trying to do some things that are not the traditional way,” says Mr Lundie. For Mr Reznick it has been something of a professional risk to “do things sufficiently differently”. It seems timely that the fruition of their ideas should coincide with their 10-year working anniversary.
