We believe that the fixed income markets are efficient with respect to interest rate risk, but regularly misprice securities that are exposed to credit, default and liquidity risks. Further, we believe that focusing on security and sector selection within a duration neutral portfolio is the most effective strategy to exploit these inefficiencies. We believe that proprietary, bottom-up, fundamental credit, coupled with nimble trading is the best technique to identify the relative value of the individual securities and market sectors. Utilizing this approach, we seek to construct client portfolios with attractive risk/reward characteristics relative to the benchmark and peers.
Our portfolio construction process emphasizes the belief that we can best generate excess return through security selection. Security selection is the largest component and has the greatest relative importance to our portfolio construction process. Sector selection is a secondary component of our approach. While our sector selection is guided by our bottom-up security selection process, we are not agnostic to the risks inherent in our sector weightings versus the benchmark. We are focused on relative sector risk and will readjust our security weightings should our security selection result in inappropriate sector exposures. However, we do not specifically target relative sector weightings. The strategy widens the investment universe to incorporate all corporate bonds denominated in U.S. dollars and Canadian dollars.
The North American Corporate Bond strategy incorporates “Plus Sectors” on a relative value basis when building clients’ portfolios. Plus Sectors include high yield / bank loans; emerging market debt (U.S. dollar and Canadian dollar denominated only); and capital securities (Tier 1, preferreds, hybrids, convertibles).
The North American Corporate Bond team employs the following investment process:
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