Fixed Income Management
Long Government/Credit Fixed Income
BHMS' Long Government/Credit strategy seeks to provide maximum long-term total return, consistent with prudent risk of principal, by investing in U.S. investment-grade fixed income securities. The strategy seeks to outperform the Barclays Capital U.S. Long Government/Credit Index over complete market cycles.
|Asset Class||U.S. Fixed Income|
|Investment Style||Bottom-Up Security Selection|
|Portfolio Benchmark:||Bloomberg Barclays U.S. Long Government/Credit|
Our philosophy is to actively manage fixed income portfolios to produce higher returns with lower volatility of return. Superior returns can be produced primarily through portfolios that offer a yield to maturity advantage versus the client’s designated benchmark. We believe the global fixed income markets are fragmented, producing temporary inefficiencies that provide opportunities for active management employing a research-driven selection process. To beat the market, we seek to "out-yield" the market by constructing portfolios of undervalued or mispriced securities and sectors.
We do not attempt to time the direction of interest rates, as it is our contention that to do so assumes an undue level of risk and volatility that is not consistently rewarded. The objective of our philosophy is repeatable and consistent added value with less volatility. BHMS is best described as a "value" manager investing in a duration-neutral, bottom-up fashion, with individual security valuation and selection as the primary focus.
Our investment process begins with a top-down analysis of the best potential return opportunities identified by our Relative Return Model. The model quantifies and ranks the total return potential of various sectors of the market over the next 12 months, assuming the prevailing yield to maturity relationships of the sectors versus U.S. Treasuries revert to their historical averages. The model guides our maturity and duration distribution along the yield curve and focuses our attention on individual security selection decisions.
When we identify bonds that have a yield-to-maturity premium versus historical comparisons, we shift our focus to analyzing the factors impacting the yield premium, ensuring that we are able to evaluate and understand these factors. We utilize the full complement of BHMS' portfolio managers and analysts in our quantitative analysis to evaluate the credit quality of corporate bonds for cash flow, earnings, and balance sheet fundamentals. In our qualitative analysis, we seek to identify factors that will impact the future credit rating of the issuer. A significant focus in our credit research effort is identifying credits that have a greater probability of ratings upgrades, and therefore greater return opportunity, while avoiding downgrades.
If a bond's current and projected fundamentals are sound, our investment team quantifies the potential performance from a subsequent change of the initial yield premium to determine attractive purchases. This selection process seeks to translate the yield-to-maturity advantage into a total return advantage. The same decision-making process that identifies a security as a "buy" also forces a discipline to sell when a security is no longer undervalued or has returned to fair value, which allows our portfolio managers to constantly evaluate whether new opportunities are more attractive than current holdings.
Our objective is to produce superior returns with lower volatility in all market environments. Therefore, our portfolio construction process utilizes a portfolio optimizer. The optimization process includes scenario forecasting and "stress-testing" of the portfolio to determine the probability of a given structure producing superior returns over a broad range of potential market environments. Multi-scenario forecasting allows our fixed income team to measure the risk/return potential of various yield curve structures in various economic and interest-rate environments, as well as the corresponding effects of changes in yield relationships among various sectors.
We strive to stay fully invested within our fixed income portfolios and we maintain portfolio effective duration within 10% of the client's benchmark index. Credit risk is managed both through fundamental analysis and diversification. Corporate securities rated "AA" or higher are limited to 3% weightings and those rated "A" or lower are limited to 2% weightings. Credit risk management is extremely important in long duration fixed income portfolios, as the smaller universe of eligible corporate securities results in higher sector and individual corporate weightings in long duration portfolios than in core and shorter duration portfolios.
Sector concentrations are derived from the security selection process, with weightings varying over time in response to market dynamics. Industry weightings are limited to 2.5 times the weighting in the client's benchmark index. Portfolios are constructed to optimize yield to maturity by emphasizing individual security holdings with yields that are unwarranted on the basis of their underlying fundamentals. Portfolios are diversified among bond sectors with 90 to 110 securities.
Portfolio Characteristics as of 3/31/2020
|Average Credit Quality||A||AA-|
|Average Weighted Coupon||3.77||4.17|
|Effective Duration (yrs)||16.37||16.44|
|Yield to Maturity||3.24||2.71|
|Performance as of 3/31/2020|
|Annualized Portfolio Returns (%)|
*3 Month returns are not annualized.
Barrow Hanley's returns are shown before investment management fees and custody expenses. Index returns do not reflect transaction costs, management fees, and other expenses. Performance is expressed in U.S. currency. Net-of-fee returns are calculated using a model fee. The model fee is based on a $100 million portfolio using our standard fee schedule.
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