Global Alternative Credit
At a Glance
- Portfolio construction combines the Global Fixed Income team macroeconomic strategy with the quantitative and fundamental sector and security selection analysis of the High Yield Credit and Mortgage team
- Yield, option-adjusted spread and expected total return adjusted for default probability are our primary measures of value
- Portfolio normally consists of 50 to 100 positions
- Investments typically are concentrated in sectors and individual issuers we believe offer the best total return potential
The investment objective of the Global Alternative Credit Strategy is to generate income and capital gains. The portfolio seeks to both (1) earn positive annual inflation-adjusted returns and (2) outperform the FTSE 3-month T-Bill plus 600 basis points over a complete economic cycle of several years.
The investable universe is generally comprised of global high yield corporate bonds rated below BBB- or Baa3 by at least one rating agency and non-agency mortgage-backed and other mortgage-related securities that are trading at distressed prices. The Strategy may also consider investment in unrated securities deemed to be of comparable quality and may also take positions in bank loans, defaulted bonds and bank loans, investment-grade corporate bonds, U.S. Treasuries, credit default swaps, emerging market debt, equities (listed and unlisted), preferred stock, convertible securities, and currencies. In addition, the Strategy may also utilize futures and take short positions in various investment instruments (including but not limited to equity index futures, equities, bonds, etc.) to manage the beta and directionality of the portfolio.
Investment Process Summary
Construction of the Portfolio combines the Global Fixed Income team's macroeconomic strategy with the quantitative and fundamental sector and security selection analysis of the Global Credit team. Yield, option-adjusted spread, and expected total return adjusted for default probability are our primary measures of value. Thus, investments are typically concentrated in sectors and individual issuers deemed to offer the best total return potential.
Global High Yield
We apply our top-down global fixed income process when making global high yield investments. The top-down process establishes the cyclical quality bias of the portfolio. This macroeconomic perspective is combined and incorporated with our quantitative screens and fundamental analysis when constructing high yield portfolios. The cheapness of individual sectors and issuers is determined using these quantitative and qualitative credit tools. The subsequent portfolio will generally consist of high yield issues that we believe to be undervalued by the credit markets.
We assess value in an extensive two stage process that considers both qualitative and quantitative analysis. Our analytical framework is focused in four primary areas: collateral analysis, deal structure analysis, performance analysis, and valuation. This analytical framework provides potential returns in a more distressed environment and determines the margin of safety relevant to the current price of the security.
We will use equity indices and other currency and credit strategies to augment directional risk exposures of the portfolio. The equity indices will be exchange-traded, which generally provide more transparency and liquidity than OTC risk-management products.
We follow a disciplined approach to sell decisions, with issues sold for two primary reasons — valuation and fundamental deterioration. An issue may be sold as it approaches our yield target and/ or another more compelling investment opportunity arises. Alternatively, an issue may also be sold when the initial thesis supporting the investment is no longer valid and significant downside is likely.