Global Sovereign Credit
At a Glance
- Primary Benchmark: Bloomberg Barclays Global Sovereign Credit Index (60% Emerging / 40% Developed)
- Real yield is our primary measure of value, followed closely by currency valuation. Inflation, monetary trends, political risks, the business cycle, and liquidity measures are also considered
- Efficient duration management and country rotation add incremental value
- Investments are typically concentrated in 10-20 countries deemed to have the best total return potential
We strive to capture interest income and generate principal growth through capital appreciation when market conditions permit. Our goal is to outperform the Bloomberg Barclays Global Sovereign Credit Index by at least 2.5% per annum over rolling three-year periods while minimizing volatility relative to the benchmark. We seek to achieve an active risk of 0% to 6% per annum measured over rolling three-year periods on an ex-post basis.
The sovereign debt and currencies of countries in the Bloomberg Barclays Global Sovereign Credit Index as well as other government-related obligations and supranationals. We may invest to a limited extent in non-index countries rated BB- or better by a nationally recognized statistical rating organization. The portfolio must maintain an overall portfolio quality of at least A- at all times.
Global asset prices that move far enough away from their intrinsic value set in motion a series of economic, policy, or political changes that ultimately lead to prices reverting back toward their intrinsic level. We utilize the over- and under-valuations of interest rates and currencies resulting from these imbalances to generate return and protect principal. This mean reversion process is integral to our investment approach.
Investment Process Summary
We apply a top-down, value-driven process when structuring Global Sovereign Credit portfolios. We seek to control risk by purchasing undervalued securities and avoiding overvalued securities. Real (inflation-adjusted) yield is our primary measure of value. Currency valuation is next in importance, as the real yield must be captured in the investor’s local currency. We focus on what we believe are appreciating, undervalued currencies and overvalued currencies that can be hedged. Inflation trends, political risks, monetary trends, and business cycle and liquidity measures are also considered. We concentrate investments in countries that offer the best total return potential. Within the desired country and currency, security selection is based on yield-curve analysis and desired duration.
We focus investments where we believe value is greatest; as a result, our portfolios tend to have an intermediate- to long-duration bias when real interest rates are high. Greater interest rate exposure is assumed in countries with more value and supportive fundamentals, and positions are established along the yield curve where we find the best risk/reward profile. Portfolio duration can range from +/- 36 months to the index.
We patiently rotate among countries and concentrate investments in markets that we believe have the highest potential returns. Secular trends, political and monetary conditions, and business cycle risks are considered in determining the likelihood that we can capture the value we see in real interest rates and currencies. Each factor contributes to our country weighting decisions.
We actively manage currency exposures in an attempt to protect principal and enhance returns. Portfolio currency and country decisions are intertwined. We seek to invest in bonds with high real yields that are denominated in appreciating currencies. We hedge our currency exposure in countries we find to have high real rates but overvalued currencies.