Our Strategy
Factors that Impact
Total Return
We have entered into a rising rate environment and bond managers could be faced with challenging investment strategy decisions as experience over the past 20 years in a zero interest rate environment proves less than useful.
Understanding Total Return Factors
With rates near multi-decade highs, we have entered into a new bond bear market that started in August 2020. This calls for new strategies and a re-imagination of the implementation of fixed income portfolios.
An established set of factors can be used managing this fund. These factors have since been studied and backtested and have been shown to generate statistically significant alpha in the past.
BILL GROSS - CONSISTENT ALPHA GENERATION THROUGH STRUCTURE (2005)
RICHARD DEWEY & AARON BROWN - BILL GROSS' ALPHA: THE KING VERSUS THE ORACLE (2019)
These five factors have been established as necessary components contributing to alpha in a total return portfolio if utilized and adjusted correctly.
We argue for a focus on total return through these five factors:
Duration
A portfolio's duration is its sensitivity to changes in interest rates. This is driven by expected inflation.
Curve
Relative positioning along the yield curve. This factor is driven by the economic outlook and Fed policy.
Credit
Credit quality exposure is an understanding and evaluation of the future of corporate America.
Volatility
This factor is mainly derived from structured credit & MBS. A portfolio’s structure is driven by liquidity and volatility conditions.
Conviction
These trades are often opportunistic and can include high yield preferred stocks, TIPS, & international fixed income (based on macroeconomic factors)