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Anchor’s Fixed Income Strategy involves a detailed macro-economic analysis that forecasts interest rate movements and default rates. It begins with the key variables that determine interest rate trends, including: GDP Growth Rates, Current Account and Budget Balances, Fiscal and Monetary Stimulus, Employment Levels and Inflation. Macro models then drive inflation and interest rate forecasts. Regional and country specific trends are analyzed to determine appropriate interest rate spreads. Specific currencies are ranked based on quantitative and fundamental analysis and interest rate differentials.
Is it worth the risk?
The research team first determines the most fundamental question: “Is the client being paid enough for the risk of a specific class of investments?” They analyze historical risk premiums for each sector of the market and then determine, based on macro-economic models, whether current premiums are attractive. The macro models are also incorporated into yield curve analysis, in order to optimize the portfolio’s duration and convexity. The team determines the most attractive duration for each sector and then creates an optimized duration and convexity for the entire portfolio. They seek to reduce risk by diversifying based on Sector, Geographical Location, Industry and Individual Security concentration.
If the managers determine that corporate credits are attractive based on their macro economic and sector analysis, then a fundamental approach is used to determine the valuation of specific issues. They incorporate a combination of the 32 quantitative models used in their equity valuation methodology (see Equity Strategy) along with 15 corporate credit models. These include interest coverage and interest burden ratios, downside risk scenarios and economic sensitivity analysis. They conduct absolute and relative yield comparisons to determine whether the security fundamentals support the yield premium and determine if the security convexity is appropriate based on the research team’s macro views.
Client Specific Approach to Portfolio Composition
The portfolio managers are responsible for tailoring the fixed income portfolio to the specific risk and return objectives of the client. Alpha objectives are based on the client’s income requirement, credit rating and duration restrictions, currency limitations and sector allocation.
Usually, the portfolio holdings are laddered to reduce interest rate risk over time and take advantage of the typical upward sloping yield curve. The portfolio is constantly monitored using risk management techniques to ensure that the portfolio is correctly constructed to produce optimized risk-adjusted returns.
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