International Opportunistic Fixed Income
At a Glance
- Primary Benchmark: FTSE World Government Bond Index ex-U.S. (unhedged) or other international bond benchmark, as specified by client direction
- Universe: The sovereign debt and currencies of countries in the FTSE World Government Bond Index ex-U.S., as well as the investment-grade corporate bond and mortgage-backed securities markets in those countries. We may also invest, to limited degrees, in emerging market and high yield debt, as well as in non-index countries rated A- or better by a nationally recognized statistical rating organization
- 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
- We strive for efficient duration management and country rotation (driven primarily by currency considerations) to add incremental value
- Investments typically are concentrated in 10-20 countries that we believe have the best total return potential
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 at least 2%, on an average annual basis, over rolling five-year periods.
Our investible universe is comprised of the sovereign debt and currencies of countries other than the U.S. in the FTSE World Government Bond Ex-US Index (WGBI), non-WGBI markets rated A- or better by a nationally recognized statistical rating organization, and emerging market debt rated BB- or higher. In addition, we may tactically invest in investment grade and high yield corporate debt and mortgage-backed securities.
Investment Process Summary
We apply a top-down, value-driven process when structuring International Opportunistic 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 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 typically concentrate investments in 10-20 countries that appear to offer the best total return potential.
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.
We believe that concentrating investments in the markets with 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 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.
Within the desired country and currency, security selection is based on yield-curve analysis, desired duration, and the wideness of credit spreads relative to government issues. Allocations to high yield issues and emerging markets are made on a tactical basis.