MFA’s Corner

mfa to launch fossil fuel free pooled investment fund

We are pleased to announce that we anticipate launching our first diversified fossil fuel free (FFF) pooled investment fund in late March. In 2017 and 2018, MFA opened two Pooled High Interest Savings Accounts to meet the needs of FFF investors. With increased focus on sustainable investing practices, and increased interest in FFF investing, a fully diversified investment product to meet the unique needs of BC’s local governments was a needed complement to our existing offerings. Our Fossil Fuel Free Bond Fund (FFFBF) has a clear mandate and will provide a low-cost, diversified, and professionally managed solution.

There are many approaches to responsible investing, from Impact Investing which targets specific Environmental, Social, and Governance (ESG) factors to specific exclusionary screening approaches – to name but two. Our first sustainable diversified pooled investment fund will employ an exclusionary screen, as this is a simple and cost-effective approach that will meet the specific needs of a large number of clients. The chosen Fund Manager, Phillips, Hagar & North Investment Management (PH&N) will use two exclusionary screening methods developed by Sustainalytics and Fossil Free Indexes to screen-out firms “directly involved in the extraction, processing or transportation of coal, oil or natural gas” as well as a list of the largest 200 global publicly-traded coal, oil and gas reserves holders. The ability to clearly communicate that mandate to stakeholders makes this an agreeable initial approach for BC’s local governments who choose to participate.

The FFFBF will be benchmarked against the FTSE Short Term Overall Bond Index. Due to the common construct of the benchmark and additional direction provided by MFA, the FFFBF will be appropriate for reserves investable for 3 years or longer. MFA will restrict PH&N from purchasing bonds with maturities greater than 7.25 years and will allow a target duration of +/- 1 year versus benchmark (estimated approximately 3 years). Targeting duration to a shortto-medium term limits interest rate risk versus longer-dated securities or longer-duration products.

We believe the FFFBF will be among the lowest-cost actively managed bond funds of its type in Canada. This is due to a combination of PH&N investing in the requisite upfront systems, the pooled structure of the fund, and relative simplicity of the “screen-out” approach. In this lowyield environment, reducing fees can have a significant impact on net return.

The impact on diversification by removing a segment of eligible benchmark securities was looked at carefully. Although benchmark constituents evolve, we anticipate the FFF screen to remove about 4% of benchmark-qualified bonds. PH&N will determine the most advantageous assets to add to the FFFBF to account for the removed benchmark securities. Generally, the fund will consist of federal, provincial, municipal, and corporate bonds with a credit rating of BBB or higher. To control credit risk, PH&N will be required to hold at least 30% Government of Canada or provincial bonds. For comparison, MFA’s current Bond Fund, which will remain very similar in construct to the FFFBF, holds about 50% AAA and approximately 18% BBB securities. The objective of the fund will be to provide a high level of current interest income and achieve moderate capital appreciation by investing primarily in high-quality securities.

We would be delighted to discuss how the FFFBF may fit into your current investment portfolio or outline additional details of this new fund. •

KYLE DERRICK is the Credit & Economic Analyst at MFABC. He is a MBA graduate from Royal Roads University. Further, he earned an undergraduate degree in Business Administration (finance) and holds a Certificate in Economics.