Fixed income has an asymmetric payoff pattern, Moore told FSA.
“If everything goes well you get the coupon and the principal at maturity. But if things go badly, and a company declares bankruptcy, you have a lot of potential downside. Bonds don’t have the upside of equities.”
Risk screening
T Rowe Price implements a multi-level process of risk analysis, utilising both external tools, such as Bloomberg Barclays risk analytics and internal methods.
“We use a proprietary credit rating, similar to rating agencies,” said Moore.
In determining the ratings, the analysts adopt a forward-looking approach. As a result, many ratings differ from the rating agency scores. “About two-thirds of our corporate ratings are more conservative [than the agencies’] now,” said Moore.
In analysing bond exposure to risk factors, the team equally weight historical time periods, thus obtaining a more conservative picture of bond volatility.
To estimate the expected volatility, the team breaks down the portfolio risk into country risk, currency risk, sector risk and many thematic risks related to monetary easing, Brexit fallout or negative yields, among others.
These different risk factors, usually correlated, are analysed without the correlations in order to estimate worst-case scenarios, Moore explained.
The cautious approach to risk is especially beneficial when market volatility emerges.
“We didn’t know what the answer [to the Brexit referendum] was going to be, but we knew that volatility was likely going to increase as we headed into the vote,” said Moore. The strategy was then positioned to benefit from a rise in volatility and specific trades were planned ahead for either outcome of the vote.
Despite the same approach taken before the 2016 presidential election in the US, the portfolio suffered when interest rates rose after the US election, admitted Moore. The losses, however, were pared in December and in 2017, he added.
Global bonds
The firm made its global fixed income strategy available to professional investors in Hong Kong and Singapore in December 2015, by launching the Global Multi-Sector Bond Fund (Sicav).
The strategy was established in 2008 and has been managed by Steven Huber since the inception. It is managed in a bottom-up process of selecting bonds based on their creditworthiness and valuation.
Solely responsible for the strategy, Huber relies on investment ideas provided by a team of 70 portfolio managers and analysts.
Because the firm has large equity holdings in companies across its products, the analyst team generally gets access to senior management, Moore said. The meetings are often attended by both equity and fixed income analysts. This type of access is usually more difficult to achieve by fixed income analysts and Moore believes it gives the firm an edge.
The global fixed income fund covers 80 countries, including emerging markets in Asia, Eastern Europe and South America. The size of the strategy allows the manager to invest in small countries without moving the markets, he said.
“Within the emerging markets we’re looking at countries that have the ability to cut rates, and those that are going through positive government reforms.”
While the portfolio invests in bonds of Chinese companies issued in Hong Kong, It does not, as yet, include onshore Chinese bonds. Access to Chinese onshore market has been the main reason for it, but as the market opens up, he added: “We’ll get there eventually.”
Six-month performance of the Global Multi-Sector Bond Fund vs its benchmark and the sector average
