Jeffrey Sherman , Deputy Chief Investment Officer, DoubleLine®
Jeffrey Sherman: We believe that macro is the best way to run a fixed income portfolio so that means forecasting what we see in GDP growth, inflationary environment whether it’s manufacturing, employment rates, trying to get the whole economic picture. So what you’ll see is that the turnover in our portfolios only happens when we see changes in dynamics. at the sector level. The changes in dynamics are pricing obviously, it’s about what the opportunity set is, but it is very important that we’re not in there fiddling with our macro views on a day-to-day basis.
What we find interesting about the flexible income space is we start with a benchmark agnostic type of view, so what you’ve seen over the last few years as the build-up in debt in the financial markets has extended in maturity, what that’s actually done to a lot of the global indices whether they’re U.S. centric, you know, looking at the global debt markets, is that it’s increased the interest rate sensitivity of the portfolio, what we call duration in the fixed income world. And so this lengthening of maturities and lengthening of duration has caused these indices to be more interest rate sensitive and some cases, more interest rate sensitive than they’ve historically ever been, and so by being flexible and not using that as the basis for thinking about the risk of one’s investments, what you can do is reduce the interest rate sensitivity of your fixed income portfolio.
The opportunities now, I think some of them are avoiding certain parts of the market too. What we find right now is that there are some challenges in the U.S. corporate credit market. It doesn’t mean we’re not willing to take some risks there but we’re very underweight relative to where we would normally be at this part of the cycle, and it’s not because we feel a recession is imminent, we just don’t like the pricing, so there’s the old adage in the fixed income space that there’s no bad bonds, just bad prices and right now there’s a lot of bad prices. It’s not that these securities are going to default, it’s just that we don’t think you’re being compensated for that. And so what we’ve liked is parts of the market that tend to be more institutional oriented, it’s not easily accessed by retail in general and these are securitized markets, and securitized market - all that means is that you package a bunch of securities together and issue a new security off of it. There’s a couple of nice features about these securities is that they have shorter lives and thus less interest rate risk than a lot of the corporate credit securities you see for comparable ratings.
So we still have a tilt towards the credit markets, we don’t think the recessions are imminent but I do believe that having this institutional framework and being able to access it is something our team has done pretty well over the last couple of decades is something that’s unique to the Canadian market and gives investors a different way of accessing credit in the global markets today
On average the portfolio managers have over 20 years in industry experience and we have on average 16 years working together making these decisions, so we heavily rely upon the expertise of not just our sector specialists who are the portfolio managers who allocate capital let’s say in the bank loan space, high yield space, it could be in mortgage back securities, it could be in treasuries but we also use an asset location team that overlays these top down views so the macro environment is what allows us to formulate where we think the opportunity set should be and where the risks are and then implement those being agnostic to these global bond benchmarks.