1. What makes MacKay’s Strategic Bond strategy different than other similar strategies in the marketplace?
- There are a lot of competitors in our space, but we always focus on the things we can control. In that regard, we differentiate ourselves from our competitors in the following key areas:
- First, we believe in utilizing the entire opportunity set available to us while avoiding an over-reliance on any on sector of the market. A hallmark of our investment approach is “diversified sources of alpha.”
- Second, Warren Buffet once said “be fearful when others are greedy, and greedy when others are fearful.” We subscribe to this approach because many times investors don’t fully understand or appreciate the nuances of different sectors of the market. Our team embraces the underappreciated sectors of the market as a means of harvesting value.
- Third, we love to use our size to our advantage by capitalizing on market sell-offs to potentially identify strong investment opportunities in weak sectors, providing we don’t believe there is any fundamental risk of impairment. In most markets, price volatility creates opportunities as these episodes are typically both short-lived and self-correcting.
- Finally, more than anything else, we recognize the value in complexity. At the root of our investment success is the realization that research is what gives us an edge. Security selection is so important when it comes to identifying and generating attractive income and total return opportunities.
2. How active are you in making changes to the portfolio?
- In our view it is very important to have a proper balance of both strategic positioning and tactical engagement in a portfolio that has wide investment latitude and few constraints.
- Moreover, given our size in the competitive landscape, we believe we are uniquely positioned to be much more active in a way that makes a difference to our investors whereas some of our larger peers are unable to do so.
- Let me provide you with a couple of examples – last summer we experienced snap elections in Europe and the UK that rattled the markets and created some volatility. In particular, we saw spreads in a number of the UK and French banks widen out on the news. Our research showed that these Global Systematically Important Banks (“GSIB”) were well capitalized and fundamentally sound, so we decided to tactically allocate into some of these banks, down in the capital structure. As market fears abated, these securities performed very well relative to the market and our expectations.
- Another good example is in the office property market. Back to our belief that we should “be greedy where others are fearful,” the office sector within the CMBS market was a great example. Headline risks were high throughout 2024, and the prevailing thought was that the need for office space in an era of hybrid work was the death knell to the sector. While defaults did rise in certain geographies and certain building types, this was not a systemic issue impacting every building and every market.
- Our research team identified properties where certain conditions could be met, including but not limited to the following:
- understand the tenants and their lease terms relative to financing on the deal,
- understand the property location and type (i.e. class A, trophy properties),
- stress the securities to see what level in cap rates/valuations could create a loss, and
- identify multiple sources of revenue for the property.
- A good example of this was a commercial real estate building in Manhattan. This was a deal that came to market in the fourth quarter. The property derives revenue from multiple sources; 1) observation deck, 2) office space, 3) retail on the ground floor and 4) the rink.
- Earlier last year we also financed a commercial building in Chicago which shared many of the same characteristics; 1) revenue from leases of the antennas, 2) observation deck, 3) office space (with United being the largest tenant) and 4) retail on the ground level. These are the types of investments we like because we believe the compensation level is very attractive.
3. What is your team’s approach to duration?
- We will always have a view on the direction of rates and the shape of the yield curve, but we don’t believe in using duration as a meaningful source of alpha generation in our portfolios. We believe that trading duration tends to be a “low information ratio” play that is difficult to execute with a high degree of success consistently.
- Now, we seek to execute curve trades that can minimize directional risk while providing a more balanced risk-return profile than outright duration plays.
- In terms of the Strategy’s duration, we believe in allowing the “natural” duration of the assets in the portfolio to define the level of interest rate risk we are comfortable taking. This will generally range between 3 and 5 years, in most environments, recognizing we have flexibility beyond these “normal ranges.”
4. Opportunities you see today in the multi-sector bond market
- Diversification continues to be the only free lunch in the market today. Valuations are still stretched in most sectors of the bond markets and we believe a disciplined, cautious approach while resisting the urge to chase speculative rallies in overvalued sectors.
It is our view that high yield is probably the cleanest sheet in a dirty pile of corporate risk. We prefer to rotate the marginal dollar into bonds yielding 7-8% with a spread over 200 bps than high quality bonds yielding 5% with a spread of 65 bps.
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Past performance is not indicative of future results.
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ICE BofA U.S. Corporate Index tracks the performance of U.S. dollar denominated investment grade corporate debt publicly issued in the U.S. domestic market.
ICE BofA U.S. High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market
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