A bottom-up approach can generate a repeatable alpha strategy, according to PGIM’s chief investment strategist, fixed income and global bonds.
Many investors noticed wide price dispersions at the start of this year, especially among high yield bonds, but now many of these apparent disparities seem justified.
“There are fundamental reasons why some credits – even those with the same ratings – trade cheaper than others,” Robert Tipp, chief investment strategist, fixed income and global bonds at PGIM, told FSA in an interview.
Moreover, the corporate bond markets are relatively stable, as the investment environment for the asset class has improved significantly since the global financial crisis in 2008.
“Market deregulation is not going to return to the dangerous levels of the 2000s, there is less leverage, while valuations and credit metrics have improved,” Tipp argued.
Tipp (pictured) is an active asset manager, who targets total returns from mostly corporate bonds across the credit spectrum, but which currently are largely confined to short and intermediate maturities.
He also allocates to developed and emerging market sovereign bonds, quasi-sovereigns, structured products and he is especially keen on securitised debt which offers a yield premium to same-rated vanilla corporate bonds.
“We identify individual bonds and sectors that offer value, rather than deliberately allocate to countries or categories,” he said. “We aim to buy undervalued bonds based on credit fundamentals, and hedge the interest rate and foreign exchange risks,” said Tipp.
“A bottom-up approach can generate a repeatable alpha strategy, and the use of hedging tools provides downside protection.”
The PGIM Global Total Return Bond strategy, an Ireland-domiciled UCITS fund, is one of the funds managed by Tripp’s team. Its investment objective is to seek total return, made up of current income and capital appreciation, in excess of the Bloomberg Global Aggregate Index.
Through buying debt securities denominated in US dollars, including those in developed or emerging market countries in US dollars or foreign currencies, the managers have generated a 5.66% return year-to-end of August, compared with 3.29% by its benchmark index.
At the end of August, the fund held the bonds of 247 issuers from 61 countries. It had an effective duration of 6.64 (longer than the 6.27 of the benchmark), a yield-to-worst of 5.79% (versus 4.79%) and an average credit rating of A3, three notches lower than the index’s Aa3.
The fund is overweight emerging markets and Europe as well as financials, and underweight the US against its benchmark, according to the latest factsheet.
In general, Tipp believes non-investment grade emerging markets are less attractive than high yield credit on a risk-adjusted basis. He prefers single-A and AA investment grade bonds issued by borrowers in the Middle East, Latin America and Asia. He also favours non-local issuers in foreign markets.
Moreover, “European credit spreads are wide relative to US corporate spreads, while interest rates fundamentals are better in some smaller countries, such as Switzerland and New Zealand, and within some emerging markets, such as Thailand, where there are low economic growth and inflation,” said Tipp.
Quantitative modelling and proprietary risk management tools provide daily feedback to the managers, enabling swift risk adjustments based on the market environment, he added.
