Heron has had a long relationship with Barbara VanScoy, an experienced fixed income manager with robust experience in community development. Last year, we decided to move $30 million of our fixed income portfolio in-house, to be managed by VanScoy so it can better reflect the wisdom and needs of our community partners.
In 2018, the Heron team released a Fixed Income Letter of Intent (LOI), which we wrote to convey our evolving fixed income strategy to our preexisting and prospective managers.
Having screened 100% of our portfolio for overall impact, we knew we needed to begin optimizing our portfolio more deeply in service to our mission — and the LOI was our attempt to communicate that ambition. We released the letter in the hopes of finding like-minded managers willing to take risks and be creative in their approach to fixed income.
Following the release of the LOI, the Heron team met with upwards of a dozen managers to discuss our intentions, including investing outside of high-credit quality communities. Immediately, we saw a pattern. Managers repeatedly explained the same obstacles to implementing the expectations set in the LOI and breaking from convention. Repeatedly, there was apprehension in decoupling from benchmarks.
“One of the big things in the LOI is that we said we were no longer going to be tethered to a benchmark. Which is very, very uncomfortable for managers. To say that we’re no longer going to judge them against the standard that everyone else is being judged against; for some people it can be very liberating, and for other people it’s terrifying. Because it’s creating a world with no barriers; that also means no excuses.”Barbara VanScoy, Portfolio Manager
There were also differing perspectives within the same organization. Sometimes, one person would be really excited about the LOI, until the compliance department dissented. Reflecting on the many conversations with managers, Dana Bezerra stated, “The intellectual curiosity is there. Very few people questioned why we wanted to do what we wanted to do. They fell hard on the sword of ‘they can’t go there’ based on their business model.”
Since bringing the money in-house, Heron’s fixed income purchases have varied depending on the needs and priorities of each community in which we operate. But broadly speaking, VanScoy has purchased securities that support:
In contrast, VanScoy has steered clear of securities that fail to show a clear use of proceeds, and (in contrast to many other managers) does not consider most corporate or mortgage bonds to be sufficiently impactful for the communities in which Heron works.
We’re aiming to curate a market-rate portfolio, with risk-adjusted returns. But our risk-measurement methodology may not align with the methodology of other financial institutions. Financial repayment is just one type of risk — we also plan to consider who is involved in the deal, the consequences to the community, and ultimately who bears the burden at the end of the day. We don’t necessarily see geographic concentration as a risk in the same way that our conventional partners might, especially as we think about working deeply in a smaller handful of places. In the Letter of Intent, we wrote:
“While we still expect geographic diversification, we believe there are significant mission benefits to being genuinely invested in the communities with which we work and in cultivating place-based feedback loops through greater exposure to those locations.”Heron Fixed Income Letter of Intent
We also plan to look holistically at all the stakeholders in the deal, not just the shareholders. In the words of VanScoy, “Is the risk equitably distributed across partners? Or is somebody carrying an undue share of the risk or subsidizing the risk for somebody else?”
Reflecting on our past work in communities since our inception, we point to the performance of the mission-driven investments during the 2008 financial crisis as evidence of the importance of implementing feedback loops from our community and capital markets partners. As we deepen our work in communities, rebuilding that implementation of feedback loops will be key to optimizing our portfolio.
More recently, our team went to a convening in the San Joaquin Valley and presented to some community partners in the region. We presented two bonds that we considered to be impactful through our data-driven, top-down lens. The reaction from the people in the room was impassioned as they informed our team that one of the bonds was creating a positive impact, but the other one was actually heightening sprawl in the region. As put by Preeti Bhattacharji, Vice President of Integrated Capitals, “Our community partners have more local context for these bonds than we could ever hope to have ourselves — it’s our job at Heron to hear them.”
Now that VanScoy is managing capital in-house, we hope those feedback loops will become even tighter. As VanScoy said, “I think it’s less of a loop and more of a weaving as to how we’ll be interacting. Which will ultimately benefit the communities in which we work.”
There are more than a few challenges associated with moving money in-house. There are systemic challenges, operational challenges, and challenges finding and retaining talent. On the last note, Heron’s leadership team noted that VanScoy stood out as an expert they could find in the field with the willingness to move beyond tradition to make creative decisions. Aside from our partnership with VanScoy, it’s been difficult for Heron to find a right intersection of know-how and mission-alignment.
This is the first time that Heron will be managing part of our fixed income portfolio in-house. And, we acknowledge the challenges that our decision may present. Nevertheless, we have strong conviction that optimizing our portfolio requires breaking from convention, whether that be moving beyond high-credit-quality communities or decoupling from the benchmarks. The aspiration is to create a fixed income portfolio that reflects the needs and priorities of the places in which we work, in the interest of helping the people and communities we care about.
If you have any thoughts, questions, or feedback, we invite you to share them with us in the comments.