The top-down and bottom-up styles of management were, for a long time, considered to be mutually exclusive. A manager was either one or the other. We believe that this is no longer the case and that it is crucial to combine the two when navigating a credit market where a significant portion of performance is driven by the general direction of interest rates, as dictated by the economy, and not by individual issuers.
All businesses, even ones of excellent quality, cannot ignore the economy in which they operate, as we saw during the sovereign debt crisis in 2011 and its subsequent resolution. Debt holders must also take into account the interdependence of economies, inflation, interest rates, monetary policy, exchange rates, governments’ economic policies, taxation, public debt…
We have observed that the bond market has become much more complex and differentiated in terms of issuer types, increased use of subordination, geographic areas, financing schemes (most notably LBOs) and issuer size. Given this, it is clear that performance in the bond market can vary widely depending on security type and positioning. It is therefore crucial, in light of this increasingly heterogeneous bond market, to be able to choose wisely when allocating funds and determining which investment themes to exploit.
Bond investing provides two potential sources of income: coupon income from buy and hold strategies, and capital gains earned through profitable trading. As different investors have different investment goals, our investment selection process necessarily takes this into account, adapting accordingly.
In a constantly changing market, dynamic liquidity levels, high volatility and variable fund flows can significantly and permanently alter what was previously a long term outlook. A flexible manager can add significant value by taking advantage of these developments.
Our investment process consists of 6 interconnected steps:
- Macroeconomic environment analysis
- Definition of and allocation to investment themes
- Determination of the split between yield and capital gain in the performance objective.
- Credit analysis and risk measures
- Fundamental portfolio construction
- Portfolio adjustment according to market fluctuations and opportunities