Global Opportunistic Total Return
At a Glance
- Benchmark: FTSE World Government Bond Index
- Invests primarily in developed and emerging market sovereign debt and currencies. May also opportunistically invest in corporate and mortgage-backed securities, including up to 15% in credit rated below investment grade at the time of purchase
- Derivative instruments may be used to gain long, short, or hedged exposure to bond and currency markets
- 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 typically established in interest rates or currencies we think are extremely overvalued, will fall in value, and can potentially generate absolute return
The strategy seeks to generate income and capital gains and to outperform the FTSE World Government Bond Index by 2% (net of fees), on an average annual basis, over rolling three-year periods.
We believe currencies and interest rates serve as economic regulators. As valuations overextend, currencies and interest rates will adjust accordingly, eventually impacting economic behavior and setting economic forces in motion that renormalize valuations in the opposite direction.
We apply a top-down, macro-driven process, investing only where we believe opportunities exist based on fundamental factors, secular trends, political and monetary conditions, and business cycle risks. Bond markets that provide the highest or lowest real yields are identified as potential longs or shorts, respectively. Currency valuations are also monitored for extreme valuation.
The Long-Short Approach
The long-short approach enables us to take positions in markets we believe to be overvalued as well as those we believe to be undervalued as long as the market size and liquidity characteristics are supportive. Furthermore, market forces supporting mean reversion must also be present. We concentrate long positions in markets with the highest return potential. Short positions are taken in markets we believe are overvalued. Once an investment becomes fully valued, we reallocate into opportunities that we perceive to have better relative value.
Portfolio duration is limited to a range of -5 to 10 years. Gross short duration may extend to -10 years providing net portfolio duration remains within range. Negative or zero duration may be employed in countries where we believe yields are at risk of rising. Long positions are generally concentrated in countries that we identify as having high real yields supported by strong macro fundamentals.
Currency shorts or hedges are used in overvalued markets, with net short exposure limited to -70% of the portfolio, subject to individual country constraints. Currency management focuses on real interest rates, currency valuations, and the perceived impact of currency valuations on economic conditions and inflation. We look for signs of behavioral change and supporting economic data that will act as a catalyst for renormalization of valuations.
Sector and Issue Selection
Within target countries and currencies, selection is based on yield-curve analysis and desired duration. For corporate debt, we strategically invest when spreads are wide and policy and economic fundamentals suggest significant spread tightening is likely.