Transcription of Finance News Network with MacKay Shields, Senior Managing Director & Senior Portfolio Manager, Global Fixed Income, Lou Cohen.Ross Youngman: Hello I’m Ross Youngman from Ausbil Investment Management and I’m pleased to be here in the offices of MacKay Shields in New York City. We’ve got the beautiful park behind us here and I’m very pleased to be with Lou Cohen, Senior Managing Director, and one of the four senior portfolio managers here.
Lou and I last caught up in Sydney in April, so it’s nice to be here in New York this time around.Getting down to business, the purpose of our interview today is to really introduce the Ausbil investment community, to the new Unconstrained Bond Fund that we’re launching in conjunction with MacKay Shields.
Lou, tell me a little bit about Unconstrained Bond Funds and where they fit in the portfolio for investors?
Lou Cohen: First of all welcome to New York, nice to see you here certainly. Unconstrained really conceptually, the key is that you can detach yourself from a traditional bond benchmark, be more flexible. Certainly be subject to guideline constraints, but formed however it’s appropriate, away from a typical benchmark. Gives you the flexibility to invest more efficiently, we believe, as well as to avoid some of the problems that typically occur within a traditional benchmark, at different points in the cycle.
Ross Youngman: Tell me a little bit about how long Mackay Shields has been running Unconstrained Bond, and a little bit about the team?
Lou Cohen: We began with our first unconstrained portfolio, almost six years ago I believe. The team has been together running fixed income, many of us, for over 20 years now. So it’s a long life team, it’s very much a team framework. So I’m sitting here with you today, but any of my colleagues could do the same. But we are significant advocates of the unconstrained framework, I think we’re now managing around $US5 billion in the strategy.
Ross Youngman: In terms of Unconstrained Bond, it means different things to different people. So what’s MacKay Shields’ particular take on Unconstrained Bond?
Lou Cohen: We try to set up our unconstrained approach to play more strengths, which we believe really are most significantly two-fold. One of which is credit selection, which is particularly important in the bond market. And the other is asset allocation. And asset allocation is critical of course in an unconstrained framework, because you’re operating without the severe constraints usually are. So over a full market cycle, we believe we can add value by operating in that unconstrained framework, using our asset allocation skills.
Ross Youngman: Interest rates are at record lows. How can the MacKay Shields Unconstrained Bond Fund help investors achieve their investment goals?
Lou Cohen: Considering our outlook for the economy, both globally and certainly here in the States, we believe the opportunity continues to earn additional return within the corporate sector, including higher yielding securities. If one thinks about moderate growth and the yield spreads that these securities are offering, we think it continues to be an attractive combination. Particularly against a backdrop of low default rates, away most importantly, away from the commodity sensitive sectors. So decent economic growth, low defaults, attractive spreads, those are good combinations.
In addition to that, the Fund takes advantage of keeping, in the present cycle; of keeping its interest rate sensitivities bond duration to a particularly low level. So the duration of the portfolio today is approximately one year. It will keep again, the sensitivity to an increase in interest rates, to a minimum. And in our view and now increasingly in the market’s view, with the Federal Reserve and the process of beginning again, to hike short-term interest rates, the combination of the additional yield and the corporate securities and the de-sensitivity, or de-sensitizing of the portfolio to the backup in interest rates. We think that combination best suits the Fund for an optimal rate of return at this point.
Ross Youngman: The Australian Unconstrained Bond that’s been launched, what’s the frequency of distributions in that Fund?
Lou Cohen: It’s quarterly.
Ross Youngman: Spreads widened earlier in the year and there was a fear that risk was back on, and that there was going to be problems going forward. How did you manage the Unconstrained Bond Fund during this period, and what changes did you make?
Lou Cohen: One of the things that may not be obvious to everyone, but certainly is part of our daily life, is that spreads can be volatile. They tighten in, they widen out on various degrees of information, or various types of information entering the market, anxieties that occur from that information. So whether it was concern about China imploding, or the decline in oil, or energy prices generally suggesting some degree of weakness in the global economy, that may not have been the case. You do become subject to this sort of volatility, it’s a normal occurrence in the bond market.
One of the things we don’t do is overreact or chase the market, or trade actively in the short term to try to avoid. Having said that, opportunities do occur. Back during the midst of that spread widening, there was concern about global banks. As it turns out, banks here in the US are particularly in solid shape. To be clear, we’re not advocating the equities of US banks; we think there’s difficulty in proving bank earnings. But banks have been turned more into utility like entities, from all the regulation the banks are facing. We think they’re a particularly solid creditor in the US.
So one of the key things we did during that time, we increased allocation to large US banks. But most importantly, we try whenever possible to keep trading activity to as low a level as is reasonably possible, to keep costs down within the Fund. We think that over time that makes a difference in total return.
Ross Youngman: When would you expect Lou, to significantly adjust the exposure of the portfolio and potentially get more conservative?
Lou Cohen: The simplest answer to that in a single word is recession. And of course, the trick is to not to do it once the recession is upon us, but to do it in anticipation of one. So when you think about our skill set again being credit selection and asset allocation, the two of those best intersect in terms of having a good handle on what’s happening to the economic cycle. And as a result, what might be happening to corporate credit worthiness.
So the key is we’ve been able to do successfully in the past, and I speak with some advantage, we’ve been together as long as we have, meaning three or four cycles at this point. So this idea that we’ve managed to put together a good track record, across our bond strategies over multiple economic cycles, suggests while certainly not guaranteeing, that we’re able to manage through those periods reasonably well.
So the hope is that the design of the portfolio certainly, is to start to de-allocate away from corporate credit risk. As we get closer to the end of this phase of the cycle, which suggests or should suggest, as we move forward here. As things stay at a reasonable keel, a good return profile for corporates, but at some point that coming to an end.
Ross Youngman: Lou, thank you very much for your time today. We look forward to seeing you again in Australia shortly, now that we’ve launched the MacKay Shields Unconstrained Bond.
Lou Cohen: My pleasure Ross.
Ends
