Fixed Income Management
Intermediate Fixed Income
Focusing on the intermediate portion of the yield curve (1-10 years), an Intermediate strategy is more conservative in nature and appropriate for those investors who are willing to forego a portion of their returns for increased downside protection. Profit sharing, endowment plans, and investors who foresee liabilities over an intermediate time horizon, such as funded depreciation accounts, are the most common investors in this strategy.
|Asset Class||U.S. Fixed Income|
|Investment Style||Bottom-Up Security Selection|
|Portfolio Benchmark:||Bloomberg Barclays Intermediate Aggregate Bond Index|
|Portfolio Assets||$342 MM as of 9/30/2019|
Our investment 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 benchmark index. To beat the market we want to "out-yield" the market by constructing portfolios of undervalued or mispriced securities and sectors.
Our philosophy seeks to preserve the natural advantage of bonds and to promote stability of the asset class within a well established asset allocation mix. Our philosophy therefore also seeks the "certainty" of yield offered by fixed income securities and precludes strategies that can detract from this natural advantage (i.e., market timing and the use of leveraged derivatives).
The advantage of our philosophy is repeatable and consistent added value with less volatility.
We are best described as a "value" manager investing in a duration-neutral, bottom-up fashion, with individual security valuation and selection as the primary focus. We believe the global fixed income markets are fragmented, producing temporary inefficiencies that provide opportunities for active management employing a research-driven selection process.
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. The model's results then focus our attention on individual security selection decisions. We search the eligible universe of corporate bonds, mortgage securities and alternative U.S. government issues for those that have a yield to maturity advantage or "yield premium" versus the most recently issued Treasury of similar maturity. When bonds are identified as having an above average yield premium versus their historical range, our focus shifts to an analysis of the factors impacting the yield premium that we can evaluate and understand. Our process seeks to translate the yield premium into a total return premium, regardless of the direction of interest rates.
Utilizing the full complement of Barrow Hanley's team of portfolio managers and analysts, our qualitative analysis evaluates the credit quality of corporate bonds for cash flow, earnings and balance sheet fundamentals, as well as any supply/demand factors which will impact the future credit rating of the issuer and the yield 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.
For mortgage securities, a critical element in the evaluation of yield is the impact of embedded options and therefore potential price volatility. We do not believe prepayment models alone are accurate enough to completely explain price volatility. We therefore enhance our understanding of the price sensitivity of mortgages through the use of "empirical effective duration" measures. By using the market's actual price volatility between mortgage and treasury securities as inputs, we derive an empirical or observed duration, which improves our ability to measure how a given security or portfolio will respond to a change in interest rates.
Yield Curve positioning is important for its "roll down" effect when short rates are less than long rates, as is the traditional shape of the curve. Because investors are willing to pay a premium for the liquidity of the most recently issued Treasury in various maturities, older "off-the-run" issues of similar maturity typically offer an incremental yield advantage. We use a Treasury Curve Model to help identify those points along the curve that offer the best yield and return potential.
If a bond's current and projected fundamentals are sound, we again use the Relative Return Model to quantify the potential performance from a subsequent reduction or compression of the initial yield premium. This selection process seeks to translate the yield to maturity advantage into a total return advantage regardless of whether interest rates move up or down. The same decision-making process that identifies a security as a "buy" also forces a discipline to sell when the security is no longer undervalued or has returned to fair value.
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. We therefore maintain fully invested, duration-neutral portfolios at all times. All portfolios are managed in a team approach, with investment strategy decisions resulting from a consensus of all fixed income professionals. Individual bond selection decisions are also consistently made across all portfolios having similar investment objectives.
In summary, we are a "value" manager, employing a bottom-up, duration-neutral, research-driven selection process to construct portfolios that beat the market by "out-yielding" the market, with lower volatility of return.
Portfolio Characteristics as of 9/30/2019
|Average Credit Quality||A+||AA|
|Average Weighted Coupon||3.19||3.00|
|Effective Duration (yrs)||3.69||3.55|
|Yield to Maturity||2.39||2.11|
|Performance as of 9/30/2019|
|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. Characteristics are presented as supplemental information to the BHMS Intermediate 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.