Our process minimizes volatility in the portfolio
We employ a multifaceted Fixed Income Investment Process.
Research and Identification
Our research process is quantitatively-driven. In our view, the primary advantage of a quantitative approach is that it provides our portfolio management team with the tools and insight to control and minimize tracking error (or, the deviation between the performances of a security and its benchmark), which minimizes volatility in the portfolio.
By their nature, fixed income investments are more conservative (and thus more predictable) than the majority of other asset classes. As such, the risk and return characteristics inherent in fixed income securities provide the opportunity to realize optimal risk-adjusted total return strategies.
The reason why is clear: there are mathematical attributes embedded in a bond’s cash flows (i.e.- the bond’s coupon) which limit the effective range of influence that portfolio volatility can have on total return. In other words, a bond’s cash flows are set and, barring default, they can only lose relative value, not absolute value.
As such, our quantitative approach is designed to maintain a specific correlation to interest rates or duration targets, which allows us to better measure and control portfolio risks and volatility. In addition, we can more efficiently inset future cash flow requirements or liabilities into a portfolio, and thus effectively quantify a reasonable range of future expected returns.
We rely upon the collective experience of our portfolio management team, as well as analytical modeling software, to create our customized client portfolios.
Our investment team focuses first on individual bond selections, then analyzes the related risk/return impact the bond’s inclusion would have on the portfolio.
A base portfolio typically contains a minimum 25 securities. As portfolios are customized for individual clients, the number of securities will change due to factors such as asset size, individual investment objective, and the selection of an appropriate benchmark.
Client portfolios are further optimized by using current, real-time, market-based inputs alongside security and sector allocations. These allocations vary, based upon both the security’s risk/return attributes and existing market opportunities/inefficiencies.
Our portfolio management system is a vital tool used by the investment management team. Our proprietary system:
Creates detailed risk attribute valuations for all major domestic benchmark indices or customized benchmarks
Identifies option-adjusted risk measures to effectively evaluate the risk/return profiles of securities and portfolios
Employs modeling techniques which calculate risk measures and valuations for complex securities
Runs scenario simulations, providing “what if” performance results relating to various risk factors (i.e.-interest rate, yield curve, sector spread, or quality spread changes)
Exposes and evaluates sources of potential tracking error, and
Measures and confirms the impact of potential trades prior to inclusion in the portfolio
Our risk management process is a core component to our long-term portfolio management process.
Because of the mathematical attributes that are embedded in bond cash flows, there is a degree of safety inherent to a thoughtfully constructed fixed income portfolio. Our risk management process is designed to further mitigate risk by:
Identifying fundamental attribution mismatches between the assets and benchmark indices
Assuring a strong correlation between the assets and benchmark returns
Calculating the performance impact of changing interest rates and market variables through Dynamic Simulation Technology
Evaluating and quantifying the impact of each trade prior to execution and inclusion in the portfolio