The process uses the same framework to garner a thorough understanding of the economic environment and for bottom up stock analysis: fundamentals, valuations and technicals (FVT). These three factors are examined regardless of whether the managers are considering a duration position or an investment in a speculative grade rated company. Consistency of decision making is impossible without using the same inputs.
The three main drivers for fixed income portfolios are rates, allocation and selection. The three categories have numerous alpha sources underlying them, and the managers optimise portfolio positioning by adjusting these sources of risk and return. They can be used to target alpha, beta or risk management depending on a fund’s mandate.
In judging whether a company is an attractive long-term investment, the managers analyse the following factors, which they call our PRISM:
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Protections – operational and contractual, such as structure and covenants
- Risks – credit, business and market
- Interest cover, leverage and other key ratios
- Sustainability, of cash flows and environmental, social and governance (ESG) factors
- Motivations of management and shareholders