Fixed Income Management

Investment Philosophy

Osprey utilizes an intermediate term (2-10 year final maturity) non-interest rate anticipatory style in managing fixed income assets.  The primary objectives of our style are to preserve capital and to enhance total returns. This is accomplished through investment in only the most liquid of fixed income securities, seeking to invest in such securities at a time of relative value, clustering the investment positions around points on the relevant yield curve where the risk/reward relationship favors the investor and trading the positions as the yield curve and risk/reward relationships change to take advantage of capital gain potential.

We seek only high quality fixed income securities with attractive relative value and proven liquidity. Under our top-down, bottom-up selection process, market conditions are carefully evaluated and risk/reward factors between sectors, rating categories, and positions on the yield curve are compared. All sector and duration decisions are made by the Fixed Income Investment Committee and the potential return for given issues is always carefully measured against the relative risk.

Investment Process

Buy Decision: The decision to buy a position is made by the Fixed Income Investment Committee. Buys of government bonds are made from a list of specific issues that are used for all portfolios, with duration targets and weightings provided by the Committee. Non-government bonds such as corporate, asset-backed, Yankee and foreign bonds in foreign currency are specifically approved with respect to credit. The Committee also determines weighting and duration guidelines for each position. The next stage of security selection and approval involves basic research. Through the utilization of both top-down and bottom-up research techniques, the Investment Committee is able to focus on the most attractive sectors of the market, the best positions on the yield curve and credits with potential for improvement. This in turn leads to the selection of securities with the best relative values and the ability to seize opportunities when given securities are clearly undervalued. All professionals are actively involved in the credit research effort. Minimal low-grade investment vehicles and avoidance of bonds with high degrees of negative convexity substantially reduces inherent portfolio risk relative to the market. Credit analysis in conjunction with our value equity research team seeks to address business risk. For non-Treasury issues, spread to relevant treasury yield is a major key to the attractiveness of an investment. We track spread levels on most large issuers of investment grade debt, including GSE’s and Yankee/eurobond issuers. Spread changes that are not credit related often present both buy and sell opportunities as they represent non-fundamental changes in relative value. Should these changes occur in a fashion contrary to current spread/economic trends, we act accordingly. Since most issuers (other than the U.S. Treasury) that we follow are also followed in our value equity research process, typical equity metrics also come into play in our fixed income credit research process.

Sell Decision: Changes in sector weightings or duration targets, made by the Fixed Income Investment Committee, result in shifts within the portfolio that are executed for all clients, subject to guidelines. Deterioration in credit quality, liquidity or relative value can be reasons to sell a corporate or sovereign credit. Changes in sector weightings are based on relative value analysis, while changes in duration are based on yield curve analysis, which will also lead to shifts within the portfolio.

Corporate bond industry group exposure is limited to 25% of portfolio value and, with the exception of U.S. Government and Agency obligations, 5% exposure in the securities of any single non-corporate issuer and 3% for new corporate positions. Corporate bond exposure is limited to 60% of the portfolio, non-US sovereign bonds (in foreign currency) are limited to 15% of the portfolio and there are no limits on U.S. treasury or agency paper. Minimum issue size is $200 million, except for foreign sovereign bonds in foreign currency (minimum of $1 billion). Maturity maximum is typically 10 years for all securities. Duration ranges are generally limited to +/-20% around the benchmark. Ratings (average) should exceed A1/A+ with no bonds carrying ratings of less than Baa3/BBB- by all major rating agencies.