Investment Objective
Our Core Conservative Strategy seeks maximize excess returns versus the Bloomberg U.S. Aggregate Index over the long term.1
Investment Philosophy
The strategy seeks to generate virtually all of its excess return from security selection: bottom-up sub-sector rotation within the corporate and mortgage/structured product sectors, and fundamental research-based security selection in all sectors.
Top-down decisions such as duration and yield curve are tightly constrained to benchmark. Sector allocations are also constrained, but modest deviations may be a source of excess return.
We manage the Strategy as a lower-risk, lower tracking error alternative to other Core Strategies.
Our philosophy is to construct highly diversified, benchmark-focused portfolios and implement risk exposures in areas where we have demonstrable expertise, such as research-based subsector and security selection, while constraining top-down exposures such as duration, yield curve, and sector allocation.
We believe that intensive, bottom-up fundamental credit research on both industries and securities, coupled with experienced relative value analysis, can effectively identify undervalued yet creditworthy subsectors and securities regardless of environment or market cycle.
We regard these as high information ratio, lower risk activities that can consistently generate alpha across markets.
Investment Process
1. Develop benchmark-focused portfolio strategy
- U.S. Government sector— use quantitative models to replicate the index with the most attractively valued securities.
- Mortgage sector—use quantitative models to identify the combination of securities within Index with the goal of optimizing expected return.
- Corporate and structured product sectors—based extensive fundamental research and relative value analysis.
2. Constrain duration, yield curve, sector and quality
The goal of this approach is to provide index-like risk while permitting us to add excess return in select areas. We then look to add alpha through subsector and security selection:
- Within U.S. Government and mortgage sectors we use proprietary tools to find attractive fundamental relative value opportunities.
- Within Corporates and structured products we identify a small subset of subsectors and individual securities that we believe offer value.
3. Monitor Portfolio vs. Benchmark on Daily Basis
Each portfolio’s risk characteristics and positioning are monitored daily by both the Senior Portfolio Managers and a separate risk manager via on-line reports. A proprietary system developed by our internal Investment Risk Management and Quantitative Research Group aggregates all risk exposures daily, for each portfolio and its benchmark.
