Fixed income and volatility
How will your portfolio be impacted
the U.S. Federal Reserve raises rates?
How do you plan on addressing these challenges?
“We approach fixed-income investing in the same way we do equity investing. We believe our advantage lies in credit analysis – the type of ideas we exploit on the equity side, we try to exploit on the credit side.”
We form a proprietary insight on why a business has better credit quality than the market perceives. Since inception, we have been invested 100% in corporate bonds and have had zero government bond exposure.
We view interest rate exposure as risk and don’t think we have a competency in forecasting the direction of interest rates. We will only take interest rate risk if we think we are getting paid for it. We don’t believe that has been the case, which is why the Portfolio has a duration of less than three years. Our mix between investment grade and high yield can change based on where we are finding value and opportunities.
Today 65% of the bond portion of the Portfolio is invested in investment grade, with the remainder in high yield. The asset allocation is approximately 70%/30% in favour of equities. We have the flexibility to go up to 60% fixed income, so today we’re at the lower end of that range. We would increase the allocation to fixed income and potentially high yields if we see more opportunities in that space.
“Some countries, including those in Africa who are less experienced with international bond markets and more demanding liquidity environments, are going to struggle. We have generally carried less duration feeling many credit curves were too flat. The Chairman of the U.S. Federal Reserve (Fed) has been more mindful of some global conditions. The strong U.S. dollar and post-presidential election back-up in rates should broadly weigh on emerging market growth, which may temper moves by the Fed and global monetary conditions generally.”
EdgePoint Global Portfolio
What is the impact of volatility on your investment approach?
We don’t believe volatility is a risk, no matter how uncomfortable the fluctuations might feel. Volatility can be an advantage. When the market becomes fearful of a security because of short-term concerns that we deem as noise, we are able to take advantage of the attractive prices that volatility can provide. Conversely, when we experience upside volatility, we are able to lock in gains and redeploy cash in better opportunities.
“It’s our job to know the value of businesses so that we can take advantage of volatility in the market to your benefit.”
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