Global Unconstrained Fixed Income
At a Glance
- We seek to generate absolute returns regardless of market conditions through strategic investment in countries, currencies, sectors, and securities
- Universe: Primarily sovereign debt and currencies of developed or emerging countries; opportunistic exposure to corporate debt of developing or emerging countries. Derivative instruments may be used to gain long, short, or hedged exposure to bond or currency markets
- Country, duration, and currency limits allow for long or short positions
- Long investments are typically concentrated in 10 to 20 countries’ bonds or currencies that we believe offer the most attractive absolute return potential
- Short positions are only established in interest rates or currencies that we think are extremely overvalued, will fall in value, and can potentially generate absolute return
- The portfolio can hold up to 35% of securities and respective currencies rated below investment-grade quality at the time of purchase
We strive to generate positive absolute returns over a full market cycle regardless of market conditions. The portfolio's goal is to outperform the FTSE 3-Month T-Bill Index on a rolling 36-month basis by 300 bps net of fees annualized.
We believe that currencies and interest rates serve as global economic regulators. As asset prices in the global market overextend in one direction, currencies and interest rates will adjust accordingly, eventually impacting economic behavior and setting economic forces in motion that renormalize valuations in the opposite direction. This provides potential return generating opportunities for our long-short approach to exploit bond markets and currencies that we've identified as either over or undervalued.
Investment Process Summary
We apply a top-down, macro-driven investment process and invest only where we believe opportunities exist with respect to interest rate levels and currency valuations. Bond markets that provide the highest or lowest real yields are identified, as potential longs or shorts, respectively. Currency valuations are also continuously monitored for extremes of over or under valuation.
The Long-Short Approach
The long-short approach enables us to take equally substantial positions in markets we believe to be overvalued as in markets we believe to be undervalued as long as the market size and liquidity characteristics are supportive. However, if we feel a market is over or undervalued, it does not necessarily automatically result in a corresponding short or long position in the portfolio. The market forces to support mean reversion must also be identifiable and present.
We look to concentrate long positions in 10 to 20 markets with the highest return potential and short positions in the markets that we believe are overvalued and are likely to decline. Real rates are combined with currency analysis to derive value. Secular trends, political and monetary conditions, and business cycle risks are also considered in determining the likelihood of capturing the value we see in real interest rates and contribute to country-weighting decisions.
Currency management is focused on real interest rates, currency valuation and the perceived impact of currency valuations, on economic conditions and inflation. Currency valuations tend to stretch but not break, and the inflection point preceding mean reversion is often signaled by a change in economic behavior. We look for these signs of behavioral change and supporting economic data that will act as a catalyst for renormalization of valuations. Long currency positions typically result from unhedged bond investments but may also be taken independently through cross hedges if we believe interest rate values are divergent from currency valuation. Short positions will typically be taken in the most overvalued markets when we believe they will decline and potentially generate return.
We concentrate long investments along the curve in countries where we believe the value is potentially greatest. As a result, our long positions tend to have an intermediate- to long- duration bias in markets demonstrating high real yields. Conversely, short duration positions can be taken when countries demonstrate low real yields, high inflation risks, and when we believe the prospects for rising interest rates are high.
Sector and Issue Selection
For clients who desire and permit the use of corporate bonds, we tactically invest in credit when spreads are wide and investors are compensated for taking additional credit risk. An allocation is only made when we feel confident that monetary easing will lead to economic recovery and the renormalization of credit spreads. By only accepting credit risk during the most attractive part of the credit cycle, we feel we are able to take on less credit risk relative to investors owning credit permanently while potentially generating high absolute returns as spreads compress.