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

Instead of focusing exclusively on yield, we search out investments that provide a reasonable risk-adjusted return. We'll examine potential opportunities until we find the right investment at the right price.

 
Risk/reward balance

Our fixed income strategies focus on balancing risk and reward, with our primary goal being to preserve capital and provide expected returns. By understanding both the fundamentals of a specific investment opportunity as well as the macroeconomic factors affecting the market, we are able to make investments that we believe offer positive risk-adjusted return.

 

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, rigorously 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 identify when we believe any of our investments begin trending into a level of unnecessary risk or are no longer profitable. In addition to bonds maturing, the following are reasons we may decide to sell a bond investment.