Fixed Income

A blended approach

Because of the nature of bond investing, we use a dual approach, blending top-down and bottom-up research methods utilizing internal and external sources. This process enables us to craft a bond strategy that is nimble enough to respond to a variety of factors as we consider opportunities in all industries, capital structures and credit qualities.

Our fixed-income investment philosophy

We use a dual approach to bond investing, blending top-down and bottom-up research methods
We cast a wide net across most bond investment classes to find opportunities that meet our stringent criteria. Our fixed-income philosophy can be summarized with three key factors:

Flexibility

Upholding our standards requires a measure of flexibility. If the best move is temporarily concentrating positions on a few sound ideas, we're willing to do it until conditions change.

Capital preservation

We seek to understand both the fundamentals of a specific investment opportunity and the economic factors affecting the market. We stringently investigate opportunities, testing our calculations, vetting every new idea and verifying our thesis before we commit.

Risk/reward balance

Rather than focus only on yield, we seek out investments that we believe offer a reasonable risk-adjusted return. We study potential opportunities until we find the right investment at the right price.


Fixed-income selection methodology

Step 1: Idea generation

Our team continuously investigates new issues and monitors secondary markets to maintain our solid understanding of the investment landscape. Ongoing communication between team members promotes the cross-pollination of ideas. We leverage our equity analysts' expertise and uncover additional income generating investment opportunities that other portfolio managers might miss.

Our understanding of the bond opportunity landscape includes reviewing:

  • Daily list of new issues
  • Company filings
  • Secondary market quotes
  • Investor presentations
  • Conferences and periodicals

Step 2: Credit/collateral review

When we evaluate a potential security, we start with extensive bottom-up research. Our internal investigation process includes pointed questions to ensure that our final conclusion is based on sound reasoning as well as financial data. We operate as our own devil's advocate, stringently investigating companies, testing our calculations and verifying our thesis before we commit.

Corporate credit considerations

  • Financial statement analysis
  • Management's stated leverage target
  • Past relationship with creditors
  • Pricing power
  • Cyclicality
  • Inflation
  • Capital structure and debt maturity profile
  • Issue that offers the best risk-adjusted return

Mortgage-backed securities considerations

  • Loan-to-value
  • Pool size
  • Servicer
  • Geographic concentration
  • Frequency/severity of default
  • Delinquencies
  • Percent of real estate owned
  • Credit support

Step 3: Due diligence

In this phase, we equip our team with documented investment rationale and then open the floor for debate. We challenge assumptions, vetting every new idea thoroughly before it advances to our approval list.

Due Dilligence

Step 4: Valuation/return on investment (ROI)

Once we've completed a thorough investigation of each investment opportunity, we calculate a specific valuation of the investment opportunity or potential ROI, depending on the type of investment.

Corporate credit

To evaluate corporate credit opportunities, we calculate valuation ranges in relation to base case and downside case assumptions, taking the following into account:

  • Enterprise value-to-earnings before interest, taxes, depreciation and amortization
  • Private market value
  • Net asset value
  • Liquidation analysis

Mortgage-backed securities

When reviewing mortgage-backed securities, we calculate potential ROI using cash flow assumptions based on three possible future pre-payment speeds (three cases based on probability of occurrence) and credit-related assumptions, where relevant.

Treasuries

For treasuries, we calculate “real” returns by adjusting nominal returns for inflation.

Step 5: Portfolio and credit monitoring

We use multiple sources for monitoring the portfolio and credit standing of all our income investments. These ongoing reviews help solidify any bond's position in our portfolio:

  • Ongoing, open dialogue about any potential credit issues
  • Daily review of company news/events
  • Daily review of overall credit fundamentals
    • Spreads
    • Interest rates
    • Defaults
    • Economic indicators
  • Quarterly internal credit review
    • Operating performance
    • Credit metrics
    • Industry dynamics
    • Financial outlook
    • Financial model update

Our exit strategy

By diligently keeping tabs on related news, credit fundamentals and potential credit issues, we are able to determine when any of our investments begin trending into a level of unnecessary risk, or when an investment has matured past its profitability. We develop the following standards for selling.

Fixed Income Exit Strategy