Fixed income philosophy

Investment Philosophy/Process

Philosophy

A consistent, risk controlled, core approach to fixed income portfolio management, founded on research-driven analysis, allows for the generation of attractive returns with less risk.

Investment Process

Vaughan Nelson utilizes four tools to add alpha to a foxed income portfolio. Flexibility withi the process enables rotation among the four tools; generating alpha across multiple environments.

1. Security Selection

Typically this tools generates approximately 40% of our alpha. We will select securities based on changing credit quality and will migrate up/down in quality depending on relative valuation. We seek to take advantage of anticipated upgrades and downgrades and we calibrate position sizes to reflect our conviction. Vaughan Nelson’s size allows us to operate in corporate issue sizes of $100 million, allowing us to access a broader range of issues versus a larger fixed income manager.

Duration/Yield Curve Positioning

We typically generate approximately 25% of our alpha from duration and yield curve positioning. We make changes based on 6 to 12 month interest rate trend analysis. As we anticipate rate movements and changes to the slope of the yield curve, we will structure barbells, bullets and/or ladders as we deem appropriate. To control risk, we limit duration bets to +/- 20% of the index.

Sector Rotation

Accounting for about 25% of our alpha, we will rotate among sectors based on relative value, perceived event risk, historical spreads versus Treasuries and our economic outlook. Within our Core Fixed Income strategy, corporate exposure can range from 0% to 75%, mortgage exposure can range from 0% to 30% and Government paper can range from 0% to 100% of the portfolio. These ranges can be modified to meet client guidelines.

Opportunistic Trading

We can typically secure about 10% of our alpha be securing attractive pricing as we access the inventory of multiple brokers and maintain strong trading relationships. We only use electronic trading for Treasuries.

Sell Discipline and Risk Controls

We will sell a security when our investment objective is realized or when relative value analysis reveals attractive substitution opportunities. A security may also be sold if event risk materializes, credit quality deteriorates and/or duration and yield curve analysis triggers portfolio repositioning. Risk is controlled through a multi-sector approach and a maximum corporate issuer exposure of 5%. Each portfolio typically holds 30 to 50 issues, all positions are limited to investment grade and all client guidelines are maintained in the Charles River trading and compliance platform.