Buy and Maintain, not Buy and Hold: how we seek to add incremental value
How we aim to capture credit risk premia by actively managing portfolios in response to changing market conditions.
On the Buy and Maintain (B&M) desk we aim to build robust investment-grade credit portfolios that can withstand multiple business cycles. We are long-term investors: we hold onto our positions across years rather than weeks or months, and usually until maturity.
However, as the name of our team suggests, we run portfolios on a buy and maintain basis, not buy and hold. Once we have built a portfolio we continue to actively monitor our holdings, and while our primary focus is avoiding defaults and keeping costs in check, we’re still focused on trying to improve the portfolio and eke out more value.
On the hunt for opportunities
Typically, we will sell a position if we believe the prospects of an issuer or sector have faltered and we begin to have credit concerns. In our hunt for opportunities to improve portfolios, we may switch between bonds, either to add value by picking up credit spread or by de-risking into what we view as a lower-risk issuer trading at similar spreads.
Our aim is to add incremental value to our portfolio through our trading activity – no single trade needs to be transformative.
For example, in the housing association (HA) sector we have recently seen a steady supply of new bond issuance from favoured HAs that, we believe, offer attractive new issue premia. This has allowed us to switch out of existing holdings in the sector, which, in our view, have been looking relatively expensive because of significant market demand, thereby picking up additional income.
Alex Moss, our senior credit analyst with 30 years of market experience, points out: "The ability to switch in HA bonds is important. We believe the market is inefficient in differentiating between the business and financial risk of the diverse strategies exhibited by the large number of issuers in the sector. Although housing associations all do the same thing, they are not all the same."
Another recent example came about because of a widening in sterling swap spreads caused by a lack of short maturity gilts in the sterling market. This technical position encouraged European banks that don't usually consider issuing bonds in sterling to come to market at cheaper borrowing rates compared with their domestic markets. This provided our B&M portfolios with opportunities to switch into new issues at what we believe to be attractive levels.
Aiming to capitalise on incremental gains
These sorts of trading opportunities are usually only available for a short period of time, so it’s important to act quickly when they present themselves. However, ensuring that we have low overall portfolio turnover is also important to us.
Depending on the strategy, turnover on a fully active fixed income portfolio can be anywhere between 100% and 400% per annum, and on index portfolios it can easily reach 20-30% per annum. Our B&M portfolios have a much lower turnover, historically remaining below 10% per annum excluding inflow- and outflow-related trading.
In summary, our approach to managing B&M portfolios is similar to the approach of a racing driver at Le Mans. We have a long race ahead and we need to avoid taking unnecessary risks if we are to reach the finish, but it’s the push for constant incremental improvements all the way to the end that, we believe, will get us on the podium.