With the second quarter just around the corner, we sat down with two of our portfolio managers to discuss the Ryan Labs core fixed income strategy and outlook. Michael Donelan, CFA, Senior Portfolio Manager and Daniel J. Lucey, CFA, Portfolio Manager share their thoughts below.
What is the investment approach to managing the Ryan Labs core fixed income strategy?
The Ryan Labs core fixed income strategy is unique in that the Ryan Labs investment team focuses on both credit fundamentals as well as bond market technicals — such as supply and demand and liquidity — to determine relative value. Ryan Labs’ philosophy is to run portfolios focused on issue selection and subsector rotation while staying neutral on interest rates. We are extremely mindful of valuation. Our view is that the credit markets are best examined over a shorter time period of 3-6 months. Longer timeframes with wider trading bonds can certainly be used for a longer term thesis to play out. In that way, the time horizon is not a hard, fixed number. However, in the investment grade credit space, it is more often that shorter periods of extreme liquidity can be used to sell into. Conversely, short periods of illiquidity based on non-fundamental factors in a particular credit or subsector can often present an excellent buying opportunity.
Ryan Labs’ process for security valuation includes fundamental analysis to decipher relative value, as well as technical analysis to forecast supply and demand in the credit markets. Fundamental analysis includes analyzing a company’s operating performance and outlook, including their revenue and earnings performance as well as balance sheet analysis, which would include current leverage ratios such as debt/EBITDA and debt/total capital. By researching a credit’s trends in either income statement or balance sheet metrics, looking at how that might affect the credit positively or negatively in the future, and comparing it to comparable peers and their spreads, Ryan Labs’ portfolio managers and analysts can uncover relative value on a particular issue or when comparing sub sectors.
Macroeconomic factors are always considered in terms of where we are in the economic or business cycle, what regions or countries have the best growth prospects — and most importantly — which sectors or subsectors are likely to benefit, or conversely are at risk, from various macroeconomic factors. We believe in analyzing macroeconomic factors as they pertain to the relative value on a specific credit or subsector.
As we enter the second quarter of 2015, where are you seeing opportunities and areas to be cautious about?
In the short duration and intermediate duration space, we are still finding relative value in the securitized credit space, particularly in lower leveraged early CMBS 2.0 subordinate bonds. In the ABS space, we continue to like the auto sector, particularly the larger subprime auto shelves such as GM Financial (Americredit/AMCAR) and Santander Drive Auto securitizations (SDART).
Within corporate credit, we are mindful of potential M&A and credit event risk at this stage of the credit cycle. We are also paying attention to names that are re-leveraging their balance sheet through excessive debt issuance or increased stock buybacks, and trying to avoid asymmetric downside in these names. We think in a post Dodd-Frank world and increased bank regulatory environment, much of the financial and major money-center bank names are running less-risky debt profiles making them attractive, even at the expense of ROE and growth.
Is the core strategy managed in a separate account, mutual fund, or both?
This strategy is available in both a separate account and a 40 Act mutual fund structure.