Global Unconstrained Fixed Income

Objective

The strategy seeks to generate outsized long term return and alpha.

Investment Philosophy

We believe that currencies and interest rates serve as global economic regulators. As asset prices in the global market overextend in one direction, currencies and interest rates will adjust accordingly, eventually impacting economic behavior and setting economic forces in motion that renormalize valuations in the opposite direction. This provides potential return generating opportunities for our long-short approach to exploit bond markets and currencies that we've identified as either over or undervalued.

Investment Process Summary

We apply a top-down, macro-driven investment process and invest only where we believe opportunities exist with respect to interest rate levels and currency valuations. Bond markets that provide the highest or lowest real yields are identified, as potential longs or shorts, respectively. Currency valuations are also continuously monitored for extremes of over or under valuation.

The Long-Short Approach

The long-short approach enables us to take equally substantial positions in markets we believe to be overvalued as in markets we believe to be undervalued as long as the market size and liquidity characteristics are supportive. However, if we feel a market is over or undervalued, it does not necessarily automatically result in a corresponding short or long position in the portfolio. The market forces to support mean reversion must also be identifiable and present.

Country Rotation

We look to concentrate long positions in 10 to 20 markets with the highest return potential and short positions in the markets that we believe are overvalued and are likely to decline. 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 we see in real interest rates and contribute to country-weighting decisions.

Currency

Currency management is focused on real interest rates, currency valuation and the perceived impact of currency valuations, on economic conditions and inflation. Currency valuations tend to stretch but not break, and the inflection point preceding mean reversion is often signaled by a change in economic behavior. We look for these signs of behavioral change and supporting economic data that will act as a catalyst for renormalization of valuations. Long currency positions typically result from unhedged bond investments but may also be taken independently through cross hedges if we believe interest rate values are divergent from currency valuation. Short positions will typically be taken in the most overvalued markets when we believe they will decline and potentially generate return.

Duration Management

We concentrate long investments along the curve in countries where we believe the value is potentially greatest. As a result, our long positions tend to have an intermediate- to long- duration bias in markets demonstrating high real yields. Conversely, short duration positions can be taken when countries demonstrate low real yields, high inflation risks, and when we believe the prospects for rising interest rates are high.

Sector and Issue Selection

For clients who desire and permit the use of corporate bonds, we tactically invest in credit when spreads are wide and investors are compensated for taking additional credit risk. An allocation is only made when we feel confident that monetary easing will lead to economic recovery and the renormalization of credit spreads. By only accepting credit risk during the most attractive part of the credit cycle, we feel we are able to take on less credit risk relative to investors owning credit permanently while potentially generating high absolute returns as spreads compress.