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Investment Grade Credit Fixed Income

The BHMS investment philosophy for its Investment Grade Credit Fixed Income strategy is to manage portfolios utilizing an active, opportunistic, bottom-up investment process that seeks 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 benchmark index.

To beat the market, we want to "out-yield" the market by constructing portfolios of undervalued or mispriced securities. We are best described as a "value" manager, investing in a duration-neutral, bottom-up fashion, with individual security selection as the primary focus. We seek to invest in bonds of corporate issuers that are temporarily undervalued for reasons we can identify, research, and document. Individual security selection is our core competency and the hallmark of our process. Due to the level of assets that we manage in the corporate bond sector, we are able to exploit the inefficiencies that exist in the bonds of smaller issuers, many of which are issued by large equity capitalization companies.

Strategy Summary
Asset Class U.S. Fixed Income
Investment Style Bottom-Up Security Selection
Portfolio Benchmark 1: Barclays U.S. Corporate Investment Grade Index
Portfolio Benchmark 2: Barclays US Credit Index
Portfolio Assets $1,040 MM as of 9/30/2017
Separate Account Open

Investment Process

Sector Selection

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 bond market sectors over the next 12 months, assuming the yield-to-maturity relationship of the sector compared to U.S. Treasuries reverts to the historical average. Bond market sectors are evaluated by quality, industry, and yield curve segment. Portfolio weightings in specific sectors are monitored on the basis of contribution to total portfolio duration.

Security Selection

We search the eligible universe of corporate bonds within sectors identified by the Relative Return Model for issues with a yield-to-maturity advantage, or "yield premium," versus Treasury bonds of similar maturity. The focus is on an analysis of the factors impacting the yield premium that we can evaluate and understand. BHMS is a large equity shareholder, which also benefits our fixed income group, as our investment professionals are able to hear directly from senior management regarding future plans for their companies.

In our analysis of the credit quality of corporate bonds, we look at cash flow, and earnings and balance sheet fundamentals, as well as any supply/demand factors that will impact the future credit rating of the issuer and the yield premium. We review the financial statements and SEC filings of the companies in which we are invested or are considering for purchase. A significant focus in our credit research is identifying the credits that have a greater probability of ratings upgrades, and therefore greater return opportunity, while avoiding downgrades.

Portfolio Optimization

Our goal is to produce superior returns with lower volatility, regardless of the direction of interest rates. An integral part of this optimization process is scenario forecasting and "stress-testing" of the portfolio to determine, with statistical accuracy, the probability of a given portfolio structure producing superior returns over a broad range of potential market environments. Multi-scenario forecasting allows the fixed income team to measure the risk/return potential of the portfolio across various economic and interest-rate environments. To the extent that such quantitative tools can help reduce the uncertainty of portfolio returns, our goal of higher returns with lower volatility is achieved.

Portfolio Characteristics as of 9/30/2017

  Portfolio Benchmark1
Average Credit Quality BBB+ A-
Average Weighted Coupon 3.88 3.89
Average Maturity 9.81 10.47
Effective Duration (yrs) 6.93 7.29
Yield to Maturity 3.23 3.08
Current Yield 3.73 3.68
1Barclays US Credit Index
Performance as of 9/30/2017
Annualized Portfolio Returns (%)

*3 Month returns are not annualized.

Disclosure

Returns from April 1, 2009 forward are for the Investment Grade Credit composite. Prior to this date, returns were those of a carve-out of all investment-grade corporate bonds held in our Core Fixed Income composite.

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. Characteristics are presented as supplemental information to the BHMS Investment Grade Credit Fixed Income composite. A full disclosure presentation may be accessed from the link above. Barrow, Hanley, Mewhinney & Strauss, LLC claims compliance with the Global Investment Performance Standards (GIPS®).

All institutional product information has been provided by Barrow, Hanley, Mewhinney & Strauss, LLC. Any questions about this material or requests for additional information may be made directly to the firm from the "Contact Us" link above.

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