Investment Strategy
At AUIM, portfolios are managed under a uniform investment approach which, is driven by a seasoned group of investment and risk management professionals performing in a team oriented environment focusing on fundamentals, technicals and valuation throughout each step of the process. AUIM believes their most valuable attribute to be the results of their rigorous approach to asset allocation and independent bottom-up credit research. The Core Plus portfolio management style uses fundamental and credit research to capitalize on misvaluations in the least efficient portions of the fixed income markets. The investment focus is on bonds whose potential for credit improvement is not reflected in current valuations. Strategies in security selection, sector weightings, and duration and term structure management are all critical to generating excess returns. The portfolios are managed from a long term perspective with the focus on delivering consistent and competitive risk adjusted returns over complete economic cycles.
The team begins their investment process with emphasis on top down factors that have significant impacts on the performance of the Core Plus Fixed Income strategy – duration and allocation. An active duration management approach is taken to position the portfolio short or long of the duration benchmark along with positioning of the curve. Concentration is given to monetary policy, fiscal policy, geopolitical environment, inflation expectations as well as sentiment and technical factors. Considerable effort is also taken positioning the portfolio optimally between governments, structured and corporate credits. Many of the same factors used in the duration analysis are also used in the allocation process.
Simultaneously, a rigorous bottom-up research process is used to evaluate securities and sectors to round out the portfolio construction process. Both top down and bottom up information is shared amongst AEGON global partners and between different fixed income asset classes in order to fully leverage all resources and provide the most optimal service to our clients. AUIM strives to exploit the inherent inefficiencies of the market and outperform the Barclays Capital Aggregate Index.
Screening Process
As a manager of risk, AUIM has ingrained a strong culture of prudent responsibility within our investment framework. Adhering to this company culture this team has developed and maintains a rigorous credit review process designed to identify and assess individual investments both as an independent holding and as a credit that will complement the current portfolio and ultimately add value.
Portfolio Managers, Research Analysts and the Core Plus Fixed Income Team collectively contribute to idea generation derived from fundamentals, technicals and valuation. The Core Plus Fixed Income Team then evaluates various outcomes in search of several strong credits which have excellent total return potential and minimal downside risk. Bottom-up credit analysis is applied to all credits using a proprietary financial model where analysts evaluate financial statements with particular focus on cash flow generation, debt levels and liquidity, monitor current events and project future credit statistics.
An overlay of top-down economic, business cycle and sector trend analysis is applied to investment candidates; this step will impact the reluctance to take credit risk in certain industry or rating categories.
Ultimately, the investment is considered within the parameters of the underlying benchmark. However, the benchmark is a baseline and not a blueprint; AUIM is willing and often does take risk away from the benchmark depending on our underlying fundamental view of a credit and the clients’ specifications.
Ultimately, the investment is considered within the parameters of the underlying investment objective. The benchmark is not a blueprint; AUIM is willing and often does take risk away from the benchmark depending on our underlying fundamental view of the market environment, risk-adjusted return possibilities, and the clients' specifications.
Portfolio Construction Methodology
AUIM’s Core Plus Fixed Income strategy is focused on fundamentals, technicals and valuation at each step of the investment process for owned and considered credits. The process begins with idea generation and preliminary screening, followed by decision making based on credit analysis and evaluation and finally the continuous management and monitoring. In constructing each portfolio AUIM’s goal is to maximize total return over a full market cycle time horizon.
Fundamental credit research is at the core of AUIM’s Core Plus Fixed Income portfolio construction. A broad understanding of industry trends and competitive landscape allow for prediction of a company’s prospects over the intermediate term. Coupled with intense focus on cash flow generation, debt levels and liquidity, analysts are able to estimate how well a company’s securities will trade relative to other credits.
In structured products, MBS and ABS, we focus on securities with superior and predictable collateral and transparent and robust structures. Further, we conduct proprietary and intensive modeling and stress testing for principal protection and performance. Additionally, loan underwriter, servicer, and issuer track records are closely scrutinized.
This fundamental analysis is then collaboratively reviewed by the Core Plus Fixed Income Team. Their general view of the monetary policy, fiscal policy, geopolitical environment, inflation expectations, position in current credit cycle and overall Core Plus Fixed Income trading levels determine the final portfolio construction. The portfolio is actively monitored by the Core Plus Fixed Income Team who actively communicates and conduct regular meetings, which include AEGON global counterparts.
Buy/Sell Discipline
The Firm’s buy and sell discipline is a combination of relative value analysis with heavy emphasis on fundamental credit analysis. AUIM focuses on strong credits supported by high industry regard, strong corporate management, and easily predictable financials. AUIM looks for extreme opportunities where credits are undervalued and misunderstood by the market. In a team based environment, they collectively focus on both sides of all buy and sell decisions allowing for the most optimal level of consideration before making a move.
At AUIM, we view trade decisions in one of two respects:
- Change in credit
This situation would include any new information that would alter the risk or return profile for the company or its industry. Credits are constantly monitored by AUIM’s research group for new information. As circumstances arise, decisions can be made and enacted quickly based on a review by Portfolio Managers, Analysts, and the Distressed Debt Team if necessary.
- Relative value trade
This situation would include trades driven by movement in security values, general market conditions, or a shift in the overall portfolio strategy.
Trading Execution Strategy
AUIM Core Plus Fixed Income trades are executed by Portfolio Managers as we believe this improves overall performance by keeping Portfolio Managers in constant communication with Wall Street trading desks and in the center of information flow. Particularly important in the Core Plus Fixed Income asset class is the Portfolio Manager’s knowledge of market technicals, which allows for the Portfolio Manager to be abreast of these technicals, thus assuring the best execution possible for each trade. Core Plus Fixed Income Portfolio Managers receive quotes from Wall Street firms, and then establish the best plan of execution based on price and ability to execute trade in the necessary size with the smallest market impact.
Additional Comments:
AUIM has a strong culture of risk management within their investment framework. They recognize the asymmetrical nature of fixed income and have expertise in managing portfolios with numerous constraints. The heart of this risk management culture within the Core Plus Fixed Income portfolios is AUIM's rigorous credit review process. This includes the close interaction and involvement in credit underwriting between their portfolio managers and research analysts.