Download Morgan Stanley Global Fixed Income Strategy

INVESTMENT MANAGEMENT
STRATEGY PROFILE | 2015
Morgan Stanley
Global Fixed Income Strategy
The Morgan Stanley Global Fixed Income Strategy is a
value-oriented fixed-income strategy that seeks attractive total
returns from income and price appreciation by investing in a
globally diversified portfolio of multi-currency debt issued by
government and non-government issuers. To help achieve this
objective, the strategy combines a top-down macroeconomic
assessment, to determine optimal beta1 positioning for the
portfolio, with rigorous bottom-up fundamental analysis and
active currency management (where appropriate).
Strategy at a Glance
Inception
Benchmark
November 1989
3
Sector weight4
Investment Philosophy
Dependent on client
objectives. Available
benchmarks include
Citigroup World
Government Bond Index,
JPM Global Government
Bond Index, Barclays Global
Aggregate Index and Citi
World BIG Index
Active positions
limited to 10%
Security weight4 Positions in a single
corporate issuer limited
to 0.5-1.0% of the
portfolio. Non-government
issuers to 5%.
The investment team believes that market participants may often mis-value
a bond issuer’s default risk, resulting in bond prices that fail to reflect the
true credit profile of an issuer. However, the team believes that the market,
over time, will re-value the bond prices of high-quality issuers based on an
improving credit profile, thereby offering investors in undervalued issuers the
opportunity to potentially exploit these pricing inefficiencies and earn superior
returns over the long term.
Typical number
of holdings5
100–150
Available
vehicles
Separately managed account
The team believes that successful portfolio management depends on
four factors:
• A value-driven process: The team contends that securities should be
evaluated for their total return over the entire market cycle, and not just for
yield generation. The team seeks to identify undervalued securities in which
the potential for price appreciation, combined with an attractive yield, can
provide a superior total return.
• Forward-looking credit analysis: Some bonds, in particular corporate bonds,
can benefit from exposure to additional risks associated with their individual
credit risk, business risk and sector risk. These additional risk factors
create an ideal environment for portfolio managers to add value, and thus
identifying situations where the market is overvaluing or undervaluing those
risks is an integral part of the team’s fundamental credit analysis process.
• Broad diversification2 to reduce portfolio risk: The team believes successful
risk management is based on five key elements: sector and security
diversification, overall portfolio credit risk, liquidity, market risk, and
duration and volatility management.
• A global approach: Given that many global players issue different tranches of
debt denominated in different currencies, the team takes a global approach
to investing, comparing issuers from around the world.
In addition, the team believes value can be added through active interest-rate
and country management. The team’s research demonstrates that countries
eta is a measure of the volatility, or systematic
B
risk, of a security or a portfolio in comparison to
the market as a whole.
2
Diversification does not protect you against a loss
in a particular market; however it allows you to
spread that risk across various asset classes.
3
A comparison to this index is provided for
informational purposes only; the index is subject
to change. The portfolio manager retains
discretion in regards to the strategy’s particular
investments. Benchmarks may be customised for
separately managed accounts.
4
Weightings provided are a typical range, not a
maximum number. The portfolio may exceed this
from time to time.
5
T he number of holdings provided is a typical
range not a maximum number. The portfolio
may exceed this from time to time due to market
conditions and outstanding trades.
1
MORGAN STANLEY GLOBAL FIXED INCOME STRATEGY
with high real interest rates and steep yield curves have
historically offered attractive bond returns, thereby providing
active managers with the opportunity to add value through
interest-rate and country management.6
The team also contends that a value-based approach towards
currency management can help generate superior fixedincome returns. Where currency management is permitted
by the client, the team assesses relative value using exchangerate and interest rate valuation models. The team takes
currency positions (i.e., purchasing undervalued currencies,
overweighting higher yielding currencies and purchasing
currencies of countries with strong growth prospects) that
reflect these value signals.
Investment Process
The Global Fixed Income strategy combines a top-down
assessment of the global bond universe with rigorous bottomup fundamental analysis:
• Macro analysis: The process begins with a top-down value
assessment of the bond universe, including a consideration
of macroeconomic conditions, the corporate earnings
environment and relative valuations. The team examines
swap spreads as a proxy for the liquidity premium
embedded within corporate spreads, and assesses factors
such as leverage and asset volatility (which drive both equity
volatility and default spreads) as an indicator of future
default expectations.
to assess the suitability of the issuer’s capital structure
for the risk entailed in the issuer’s business. The team’s
forward-looking proprietary cash flow models enable them
to understand the likely future financial profile. The group
also seeks to understand management’s intentions, in terms
of business development and capital structure, and ability
to execute.
• Valuation analysis: The team then conducts a relative
valuation assessment on potential investment candidates.
Using default data and average risk premia, the team derives
a fair value spread for each bond that is compared to the
market spread to determine a bond’s under/overvaluation.
• Portfolio construction: A portfolio based on specific client
guidelines is constructed, with sector allocation driven
primarily from bottom-up security selection (subject to
the team’s risk management guidelines). Integral to the
team’s portfolio construction process is the measurement
and monitoring of market risk, duration and volatility, and
credit risk through the use of proprietary risk measures
and proprietary models. The team actively manages spread
duration with a target range of +/- two years versus the
benchmark, with portfolio duration targeted at +/- one year
around the benchmark.
Display 1: Top-down macro analysis integrated with rigorous
fundamental analysis helps provide optimal portfolio
positioning
•Screening: The team applies a unique combination of
quantitative and qualitative filters to identify bond issuers
that meet its investment criteria in terms of competitive
position, franchise value and management quality. The team
uses a proprietary quantitative model, Distance-to-Default,
to calculate how far an issuer is from theoretical default.
Plotting this metric against a bond’s yield spread allows the
team to identify bonds offering potential attractive rewards
relative to their associated risk.
• Credit analysis: The team focuses on financial risk, business
risk and management ability/intentions. When analyzing
business risk, the team assesses an issuer’s competitive
position, its diversification and growth potential, the value
of its franchise and the flexibility of its business model in
terms of the variability of its cost structure. Financial risk
involves an examination of a issuer’s financial statements
6
Past performance is no guarantee of future results.
2 Top-Down Value
Assessment
Risk
Management
Client’s
Objectives,
Guidelines and
Benchmark
Quantitative
Screen
Fundamental
Analysis
This diagram represents how the portfolio management team
generally implements its investment process under normal market
conditions.
STRATEGY PROFILE | 2015
Competitive Advantages
Investment Team7
• Combined quantitative and qualitative investment
approach: The team’s investment approach integrates strong
The Global Fixed Income strategy is managed by Michael
Kushma, Christian Roth, Richard Ford, Federico Kaune and
Yoshinobu Kou, with the support of the Global Fixed Income
team. The team also leverages the research and resources of the
Credit, Interest-Rate, Mortgage, Emerging Markets Debt and
the Fixed Income Portfolio Specialist teams.
qualitative analysis with robust quantitative valuation tools
at every stage of the investment process, providing a dynamic
credit management process.
• Extensive experience: Morgan Stanley Investment
Management’s (MSIM) Global Fixed Income team has
invested in fixed-income assets since 1975.
• Global research: An emphasis on a team-based approach
to research and investment allows investors to benefit from
the combined insight and expertise of MSIM’s global
fixed-income team. Approximately 80 percent of MSIM’s
research is generated in-house, and this is supplemented by
Morgan Stanley sell-side and third-party research.
7
Team members may change from time to time without notice.
3
For Business and Professional Investors and May Not Be Used with
the General Public
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Risk Considerations
Past performance is not a guarantee of future performance. The value of
the investments and the income from them can go down as well as up
and an investor may not get back the amount invested. There can be no
assurance that the strategy will achieve its investment objectives.
Investments may be in a variety of currencies and therefore changes
in rates of exchange between currencies may cause the value of
investments to decrease or increase. Furthermore, the value of
investments may be adversely affected by fluctuations in exchange rates
between the investor’s reference currency and the base currency of the
investments.
For investments in emerging markets, the volatility and risk to your
capital may be greater due to potential price volatility, political and/or
economic risks. Debt securities may not be rated by a recognized rating
agency.
High yield fixed income securities are considered speculative, involve
greater risk of default and tend to be more volatile than investment
grade fixed income securities. Securities of small capitalization
companies: these securities involve greater risk and the markets for such
securities may be more volatile and less liquid.
Strategies that specialize in a particular region or market sector are more
risky than those which hold a very broad spread of investments. Where
strategy concentration is in one sector it is subject to greater risk and
volatility than strategies that are more diversified and its value may be
more substantially affected by economic events in a particular industry.
Investments in derivative instruments carry certain inherent risks such as
the risk of counter party default and before investing you should ensure
you fully understand these risks. Use of leverage may also magnify
losses as well as gains to the extent that leverage is employed.
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