Risk premia investing is the core of our credit investment process. The approach is bottom-up driven analysis of companies and builds on a combination of the in-house developed multi-factor risk premia model as well as a qualitative due diligence of the issuers. Quantitative models cannot be directly implemented in today’s illiquid credit markets, so the team is further adding value by ‘translating’ the strong model results into an actual tradeable portfolio. Portfolio construction and risk management are an integral process with the purpose of creating alpha from security selection and at the same time apply market-neutral macro-factors such as risk free yields and FX.
“Portfolio alpha derived from companies with improving or stable credit quality”.
Our multi-factor risk premia model works with three main groups of factors driving excess return: value (spread vs. fundamental credit quality), momentum and balance sheet stability. We give very high emphasis to input data quality to ensure stability, robustness and confidence in the model output. Moody's KMV CreditEdge is a core part of our model, as Moody’s has the most comprehensive and detailed database for loss-given-default data. Similarly, CreditSuisse HOLT provides high quality data on company earnings and balance sheet figures.
The model output is a score between 0-100 for more than 2000 bonds. Bonds with the highest scores have consistently outperformed bonds with lower scores - both in up and down markets. However, a mechanical implementation of the model output is not advisable or feasible in today's illiquid credit markets, and we can add additional alpha from our due diligence and implementation process.
The credit team analyses the 150 companies with the highest scores. The due diligence process starts with a validation of the factors going into the quantitative model. Secondly, we evaluate the company according to sector and issuer specific factors.
Portfolio construction and risk management are an integral process. Bloomberg PORT is used to measure and evaluate exposures to a broad range of macro risk factors. In addition, an in-house model evaluates credit risk along various dimensions: a) effect of a company default, b) effect of spread changes and c) market's risk perception of a security (spread duration x spread).
A bond can be bought into the portfolio if it has an improving or stable credit quality together with an attractive risk/reward relationship. At a score below 50, the bond is reviewed for potential sale and sold at a score below 20.
We view our portfolio size as being close to optimal, as we have sufficient AUM to get full attention from investment banks, but still ease to execute trades without moving the market - also in the rationed primary market where we receive meaningful allocations due to our consistent dialogue with syndication teams.
All portfolio managers have a dual role as portfolio manager and analyst to make sure no relevant information is lost in communication between analysts and managers. The team has full discretion on all decisions within the product range. Decisions are taken by simple majority - in practice nearly all decisions are taken unanimously.