Good Yield Hunting
AB Global Bond fund has outpaced peers and transformed an old-school bond fund by using both fundamental and quantitative analysis.
By Sarah Max
.
Scott DiMaggio, left, and Doug Peebles pair fundamental analysis with quantitative models for their global bond fund. Photo: Laura Barisonzi for Barron’s
The postscript: Scott DiMaggio, 45, parlayed his computer skills into portfolio management and is now director of global fixed income at AllianceBernstein. That star manager, Doug Peebles, 51, was promoted to the firm’s chief investment officer of fixed income in 2004. They continue to work together as co-managers of the $5.2 billion AB Global Bond fund (ticker: ANAGX), which has averaged 4.8% annual gains over the past three years, better than 92% of its intermediate-bond peers.
After several years of testing and tweaking, Peebles added a quantitative component in 2004 and a year later promoted DiMaggio to co-manager.
The typical multifactor fund uses fundamental investing principles to build quantitative models. This fund gives two teams—one quant, one fundamental—autonomy to form two distinct views. At the same time, nine quantitative analysts use data to score individual securities and spot patterns, and the firm’s more than 50 fixed-income analysts look at securities and sectors through a fundamental lens. “The quant team is able to efficiently assess thousands of securities globally, but the fundamental team gives us depth in understanding what’s behind the numbers,” says DiMaggio.
For instance, in the early days of the European debt crisis, the quant models flagged Greek sovereign debt as a buy, based on what were still BB+ credit ratings, plus yields rising into the low-double digits. The fundamentalists, however, had a very different thesis: They believed there was a 90% probability that Greece would fail. The managers avoided Greece.
The model proved more reliable at forecasting persistently low interest rates, even as strategists kept insisting—for years—that rates were about to rise. Only recently have the managers begun to position Global Bond for higher rates.
This isn’t to say the fund takes big macroeconomic bets. Quite the opposite. Soon after adding the quantitative component to their decision-making, Peebles and DiMaggio made two changes aimed at improving risk-adjusted returns. In 2006, they began hedging currency risk, after concluding that returns from currency added significant risk and detracted from returns. So while they make select investments in currency—early this year they came to the view that some emerging-market currencies were undervalued—their base position is to hedge currency risk.
In 2007, they expanded the fund’s mandate, so they could invest in multiple sectors. Investing exclusively in government bonds, as they did before, might sound like a low-risk approach, says Peebles, but in reality it requires making outsize country bets. “A multisector fund is significantly more diversified,” he adds. The fund owns some 1,000 securities from 500 issuers.
In the five years through Aug. 31, its standard deviation, a measure of volatility, was lower than 88% of Morningstar world bond funds’.
Today, more than 40% of the fund is in government bonds aimed at providing stability; Italy, Britain, and the U.S. are its top sovereign destinations. Half of the portfolio is earmarked for sectors that offer additional returns.
One area on which quantitative and fundamental findings agree is the U.S. housing market’s strength. This view translates to a 6% stake in credit-risk transfer securities. Relatively new, these are similar to mortgage-backed securities, in that their underlying mortgages are conforming loans underwritten by the likes of Fannie Mae and Freddie Mac. The difference is that if the loans experience losses, the agencies aren’t on the hook. This adds risk—and an extra two percentage points in yield—but AB’s analysis suggests a low likelihood of default.
Yet, in another example of the data lining up with the story, the team shopped for “fallen angel” energy bonds in the first quarter of this year. Freeport McMoRan bonds were trading at $67 when they began buying in January 2016. (A bond is considered at par value at $100.) They rebounded in the spring, and the fund sold them at $96. The fund has since dialed back its high-yield energy exposure, but still has 2% of its assets in some of the sector’s investment-grade names.
Recently, the portfolio chiefs have shifted from virtually no emerging-market exposure to buying sovereign bonds in Argentina, Colombia, and Brazil. Global Bond began adding to its Brazilian holdings, which now account for about 4% of its assets, as bond prices plunged during former President Dilma Rousseff’s impeachment. The quantitative models identified 10-year yields—at one point, they were nearly 17%—as a global outlier. The scandal that felled Rousseff has wound down, and with it, so have yields, which were recently around 11%.
0 comments:
Publicar un comentario