Fri, 09/11/2007 - 05:57
Baring Asset Management, which was among the first wave of managers to be awarded a global fixed-income 130-30 mandate by CalPERS in June, believes that relaxing long-only constraints can be beneficial to fixed-income investors by allowing better access to alpha and improved risk/return characteristics through greater symmetry of investment opportunity.
In a paper entitled 130-30 Fixed Income Investing: Relaxing the Long-Only Constraint, Toby Nangle, Barings' director of fixed income, says: 'We are seeing more demand from institutional clients and consultants for alpha generation from fixed-income portfolios.
'Multi-currency global fixed income 130-30 investing offers one way to both generate more alpha and improve the information ratio while still investing relative to a benchmark. Most of the debate around 130-30 strategies has, up to now, been focused on the equity side. However, the sources of excess returns and the potential benefits in 130-30 fixed-income investing are quite different from the equivalent equity only mandates.'
Barings breaks down sources of global fixed-income portfolio excess return into five main dimensions, inter-market spread positioning, yield curve positioning, currency positioning, credit positioning and duration management.
Regarding inter-market spread positioning, the study says managers' ability to add value by taking views on one market relative to another is significantly less constrained under 130-30 than long only. With the long-only constraint a manager cannot position for underperformance of smaller markets, but with 130-30 these constraints are removed.
A manager of long-only global fixed income mandates is currently constrained to positioning for flatter or steeper yield curves in only the largest bond markets. A shift to 130-30 broadens this opportunity set to a large variety of smaller markets.
He says small index weights constrain a manager from a bearish view on minor currencies, a constraint that is removed under 130-30, while negative views on both categories of credit can be implemented using 130-30 to a greater degree than currently available with the long-only constraint.
Examining the fifth main source of excess return, duration management, the study argues that in most cases there is already sufficient scope to outperform the market from management of duration against the benchmark. Therefore overall duration positioning will probably not be affected as much by a move to 130-30 since there is already scope to take a large relative duration position.
'Barings' top-down fixed income investment process means that its active global fixed-income managers already spend much of their time analysing the relationship between markets and the main sources of excess return,' Nangle says. 'Moving from long-only to a 130-30 approach for multi-currency global-fixed income is a natural extension of our top-down investment process, while removing the asymmetry of opportunities available.'
Baring Asset Management is an international investment management firm encompassing developed and emerging market equity, fixed income and multi-asset portfolio management services for clients including public and corporate pension plans, government agencies, financial institutions, charitable organisations, mutual funds and private individuals. Barings is part of the MassMutual Financial Group, a diversified financial services organisation and parent of Massachusetts Mutual Life Insurance, one of the largest US life insurers.
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