Global Investment-Grade Sovereign Fixed Income
At a Glance
- Primary Benchmark: FTSE World Government Bond Index (unhedged) or other global sovereign bond benchmark, as specified by client direction
- 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 (driven primarily by currency considerations) add incremental value
- Investments are typically concentrated in 10-20 countries deemed to have the best total return potential
Objectives
We strive to capture interest income and additionally generate principal growth through capital appreciation when market conditions permit. Our goal is to outperform the investment benchmark by 1% (net of fees), on an average annual basis, over rolling five-year periods.
Universe
The investible universe focuses exclusively on sovereign debt and currencies of countries in the FTSE World Government Bond Index (WGBI), non-WGBI markets rated A- or better by a nationally recognized statistical rating organization, and select emerging market debt and currencies that adhere to these quality guidelines.
Investment Process Summary
We apply a top-down, value-driven process when structuring Global Fixed Income portfolios. 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 (dollars for U.S. investors and euros for many of those in Europe, for example). We focus on what we believe are appreciating, undervalued currencies and will hedge currencies we consider overvalued. Inflation trends, political risks, monetary trends, and business cycle and liquidity measures are also considered. We typically concentrate investments in 10-20 countries that appear to offer the best total return potential.
Duration Management
We concentrate 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 positions are established along the yield curve where we find the best risk/reward profile. Portfolio duration generally ranges from 1 year to 10 years.
Country Rotation
We believe that concentrating investments in the markets that we consider to have the highest potential returns−that is, taking above-average country risk−actually reduces overall risk. 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.
Currency
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 with high real rates but overvalued currencies.
Issue Selection
Within the desired country and currency, security selection is made on the basis of yield-curve analysis and desired duration.