International Fixed Income Investment-Grade
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 a limited degree, 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.
The investible universe focuses on sovereign debt and currencies of countries 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 select emerging market debt and currencies that adhere to these quality guidelines. We may also tactically invest in investment grade corporate debt and mortgage-backed securities.
Investment Process Summary
We apply a top-down, value-driven process when structuring International Fixed Income portfolios. Real 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 we believe provide the best value and total return potential.
We concentrate investments where we believe value is greatest; as a result, portfolios tend to have an intermediate- to long-duration bias when real interest rates remain 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 greatest value and the highest potential return and, thereby, taking above-average country risk, actually reduces overall risk. 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 seen in real interest rates and contribute to country weighting decisions.
Currency and country decisions are intertwined. Bonds of countries with high real rates and a currency appreciating from an undervalued level will be held to take advantage of that appreciation as well as to benefit from the positive effects on inflation that a rising currency can provide. Currency exposure in countries with high real rates and an overvalued currency may be hedged to take advantage of the disinflationary effects of past overvaluation.
Within the desired country and currency, security selection is made based on yield-curve analysis, desired duration, and wideness of credit spreads relative to government issues.