Taking the lead on credit
Q&A with Tarryn Sankar, Head of Credit, STANLIB Fixed Income
Tarryn Sankar plays a pivotal role in managing credit in Fixed Income investment team at STANLIB, which is responsible for ensuring that any credit risk clients are exposed to achieves a balance between appropriate risk and reward. Credit is an integral component of STANLIB Fixed Income’s investment process. The team’s credit philosophy is considered, looks through the cycle, and seeks to achieve consistent and stable returns. In this Q&A, Tarryn shares some perspectives on her role, the state of South African credit markets after the unrest and investing in SOEs.
1. What are the three key lessons you have learned in your career as a credit specialist and Head
- To be truly meaningful, credit research must translate into tangible investment outcomes (buy, hold or sell decisions) for client funds.
- Hold your views lightly. No one is perfect, you can and will it get it wrong at some point in your career, so be willing to suspend judgement when processing new information and updating your investment views.
- Over time, you will develop heuristics and flags that will serve as your own unique early warning signals for impending credit stress. Always do your research but trust these flags.
2. Describe a typical week for you?
In a typical week, we engage with other investment teams on markets and investment themes. These meetings ensure we formally share credit views across the investment platform and teams are able to leverage and challenge our thinking for their portfolio construction. The Fixed Income team holds daily meetings to understand key data releases, how they impact bond positioning in client funds and the knockon effects for the credit team. Team perspectives guide focus areas for credit research and risk analysis.
Regular Credit Committee meetings are critical for good governance and oversight. The committee, which is independently chaired, will approve all new and existing proposals. Limits, exposures and recommendations are independently chaired, will approve all new and existing proposals. Limits, exposures and recommendations are reviewed on a quarterly basis. During the height of the pandemic crisis, committee meetings were held weekly.
Apart from internal meetings, I try to divide my attention between developing and supporting my team in producing high quality and relevant credit research and analysis, building and enhancing certain elements of the credit process and reading broadly to identify events that may trigger changes to current bond issuance and or credit spreads.
Engaging with clients is an important part of my job and it’s something I really enjoy, whether it is by providing standard client reports, conducting investment due diligence processes or responding to specific client queries. I find it really grounds me and reminds me of the people to whom we are ultimately accountable.
3. How has the recent social unrest influenced your view on the Fixed Income market?
The impact on the overall credit market from the social unrest was relatively benign. A number of issuers have successfully raised funding in the local debt capital market since the unrest. Pricing and liquidity did not alter meaningfully. However, certain areas were affected, such as property-specific issuance. Spread widening was evident for Redefine Properties Limited, who issued three year debt via private placement at 200bps over three month JIBAR whereas the pre-COVID level was closer to 160bps over three month JIBAR. Fortress REIT Limited also raised debt via private placement in the last month and continues to see spreads for three and five year paper (200bps and 240bps respectively) trade wider than pre-COVID levels (165bps and 185bps respectively).
For Fixed Income generally, offshore market events continue to exert more influence on local bond pricing. This was true even after the recent South African cabinet reshuffle, when the market response was relatively muted and short-lived.
In our view, the longer term effect on investor confidence of the social unrest will be an important determinant of fixed capital formation and the need for corporates to raise debt to fund capital expenditure.
4. Please explain how to invest in domestic SOEs, which is critical for economic growth and can generate returns for investors, while managing the risks.
Investing in SOEs is certainly important for economic growth. Many of these entities have a strong investment case and are well positioned to deliver sustainable riskadjusted returns for debt investors. However, we need to assess a number of risks.
Understanding the credit risk (risk that the SOE borrower will not be able to honour interest and/or principal payments) is critical. We look at financial and non-financial factors and consider various nuances, given the nature of each business:
- Financial: independent and in-depth credit analysis based on through-the-cycle views of credit quality is key. Third-party ratings are merely an input into our credit assessment.
- Non-financial: detailed ESG analysis and a well researched and substantiated view of the quality of management and government oversight and support are critical elements of non-financial risk. They have a significant influence on the financial performance of SOEs.
Debt issued by certain SOEs is government guaranteed. Although they are a meaningful source of credit enhancement, a government guarantee is not a panacea for all investment risk. We evaluate an overall investment case, rather than merely assessing the quality of a government guarantee.
Concentration risk arguably deals more directly with portfolio construction than pure asset selection but it is meaningful in the context of SOEs, where contagion risk is very real. The questions we seek to answer are what the appropriate level of SOE exposure should be in client funds and how to best reach that target over a period of time.
Liquidity risk relates to the importance of forming through-the-cycle views of credit quality. Excluding some of the larger SOEs (such as Eskom or Transnet), secondary market liquidity can be limited at times.
We use these lenses to help us answer the question whether SOE-issued debt offers good value for the risks it introduces to client funds.
5. As we come to the end of Women’s Month in SA, what are the two most important pieces of advice you would give a young woman starting out in the world of finance?
Success is not linear and failure is not final. Deeply interrogate your motivation for getting into the industry in the first place. You will be tested (both personally and professionally) in the course of your career, so remind yourself of the reasons you stay. Just doing it for the money will not sustain a long and fulfilling career in this industry, in my view.
Never underestimate the power of creativity in financial services, whether it’s in building solutions to client problems, understanding and communicating the impact of market events or even designing your own career trajectory as a woman in this industry. On that point, even in 2021, be prepared to search and NOT find nearly enough women at the highest levels of asset management or financial services. Equally, be prepared to imagine a different future for yourself and this industry and use that vision to build new tables for other women to sit at, rather than fight for a seat at a table that was never built with you in mind.