Fixed Income Management
Long Credit Fixed Income
BHMS' Long Credit Fixed Income strategy is designed to meet the needs of defined-benefit plans seeking to reduce the volatility of their funding status by matching pension liability expectations with assets. With more than two decades of experience managing customized long duration strategies, we have the ability to create custom liability benchmarks for individual plans by modeling plan liabilities.
|Asset Class||U.S. Fixed Income|
|Investment Style||Bottom-Up Security Selection|
|Portfolio Benchmark 1:||Bloomberg Barclays U.S. Long Corporate Index|
|Portfolio Benchmark 2:||Bloomberg Barclays U.S. Long Credit Index|
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 an 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 sector versus U.S. Treasuries revert to the historical average.
BHMS' fixed income investment team searches the sectors identified as attractive by the Relative Return Model for bonds with maturities longer than 10 years that have above-average yield premiums versus their historical range. These issues are analyzed to determine whether the factors generating the yield premium can be evaluated and understood.
Utilizing the full complement of BHMS' portfolio managers and analysts in our quantitative analysis, we evaluate the credit quality of corporate bonds for cash flow, earnings, and balance sheet fundamentals that will impact the future credit rating of the issuer and the bond's premium. A significant focus in our credit research effort is identifying those 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 below "A" 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-||A-||A-|
|Average Weighted Coupon||4.23||4.88||4.96|
|Effective Duration (yrs)||14.69||14.45||14.25|
|Yield to Maturity||3.82||3.87||3.91|
2Bloomberg Barclays U.S. Long Credit Index
|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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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.