Since fixed income benchmarks are market-capitalization weighted, companies and industries with the most debt have a higher weighting in the index. Unlike benchmark-relative portfolios, buy & maintain mandates are not usually tied to such allocations and therefore do not favor companies or industries with large amounts of debt outstanding. This can allow more diversified portfolio construction across issuers and industries.
For some buy & maintain mandates, clients may identify a starting benchmark to help determine their yield or spread objective; however, benchmarks are not typically used as a performance measure.
Most buy & maintain mandates trade less frequently due to constraints such as gain/loss considerations, long-term currency hedges, need to maintain target yield or other accounting constraints. Given the longer investment horizon for these mandates, maintaining higher liquidity is typically less important. This allows the portfolio managers to favor attractive, albeit at times less liquid issues and potentially harvest an additional liquidity premium over the investment horizon.
LONG-TERM FUNDAMENTAL FOCUS
Near-term volatility of issuers or industries can be less of a concern, whereas credit-quality migration in the long term takes on more importance. During credit selection, additional criteria to consider may include business viability given technological disruptions and shifting demographics, barriers to entry and macro-economic secular risks. This allows portfolio managers to focus more on long-term fundamental risk as opposed to short-term relative-value dislocations.
These portfolios typically have a yield or spread focus and are targeted toward long-term holdings with minimal possible credit risk. They can be customized to clients’ investment guidelines and are often constructed to meet specific cash-flow needs, turnover limitations, duration and quality objectives.
The core tenet of the Loomis Sayles Buy & Maintain Investment Grade Corporate Bond Strategy is to seek attractive yield while minimizing credit risk. We do so by investing in a fundamentally robust, diversified portfolio where each bond is carefully selected to reflect long-term risk and return. We believe the expertise we bring to credit selection, portfolio construction and customization sets our strategy apart (see exhibit below).
Given that a buy & maintain portfolio is not constructed for frequent trading and repositioning, a high level of care and diligence in credit selection is critical at portfolio inception. The primary risks to a customized buy & maintain portfolio are factors that could impede meeting a client’s objectives—forced sales and defaults that result from credit migration. For clients with specific guidelines on downgrade-based selling, portfolios may realize steep losses from forced sales. Issuer defaults could lead to a permanent loss of capital and a lower-than-target portfolio yield. Given these potential risks, Loomis Sayles built its buy & maintain discipline on its longstanding strength—credit analysis. Loomis Sayles has been rating credits since 1926 and its career credit-research team covers 98% of the Bloomberg Barclay’s Corporate Universe. Rigorous and fundamentally driven credit analysis is the cornerstone of our investment philosophy and a driving force behind our strong investment performance.
Our team of analysts has the expertise to determine forward looking ratings that may take into account not only current credit metrics, but projected longer-term fundamentals that are key for long-horizon buy & maintain portfolios. These include but are not limited to factors such as cash-flow stability, barriers to entry, secular industry headwinds and management quality. The portfolio management team continues to monitor the credit quality of the portfolios beyond inception and exercises a sell discipline that seeks to proactively reduce exposure to issuers with risks skewed to the downside.
Building portfolios that can withstand the peaks and valleys of economic and credit cycles requires an expert and experienced investment management team that can weave together top-down macroeconomic themes with bottom-up security selection. The buy & maintain portfolio managers use their deep knowledge of the properties of credit risk and default phenomena to analyze, select and size issuers and industries judiciously. Our team makes critical decisions to limit exposure to issuers, sovereigns or industries that appear to offer unattractive, long-term risk-adjusted yield.
Loomis Sayles has spent years developing a proprietary portfolio-construction platform that takes into consideration client guidelines, internal credit ratings and outlooks as well as specific buy & maintain liquidity and risk parameters to assist in constructing optimal portfolios that can balance return with risk. The portfolio management team scrutinizes the credit worthiness of all issuers and ensures that the portfolio is well diversified across factors such as industries, countries/region, quality, and capital structure.
Buy & maintain mandates tend to be highly customized. We have partnered with clients across a spectrum of risk-and-return objectives to meet their individual needs. We are able to customize mandates to help accommodate specific yield or spread requirements, cash-flow needs, average-quality guidelines, regulatory restrictions, gain/loss restrictions, environmental, social and governance (ESG) factors and other client-specific guidelines. See Appendix for a broad overview of customization we have provided for clients.
A buy & maintain mandate requires a high level of monitoring and maintenance. Loomis Sayles portfolio managers focus on preserving the optimal risk profile and yield target based on the original risk-return target and turnover guideline.
As part of our maintenance process, we constantly monitor the credit worthiness of each portfolio holding and proactively identify holdings that present material downside risk. For such holdings, the portfolio management team works closely with the credit research analysts and traders to perform detailed scenario analysis to estimate expected downside. The probability of default, while low for investment-grade credits, could rise sharply if quality declines and/or the investment horizon extends. We work with our clients during portfolio funding to determine a relevant downgrade bucket as well as appropriate parameters for a sell discipline. We are sensitive to the impact of realizing losses in the portfolio and thoroughly review each credit before taking action.
We exercise the same level of diligence when participating in tenders and exchanges. For mandates that allow reinvestment, we seek to find the best available opportunities to rebalance risk and enhance potential yield relative to hedging costs when necessary. We also may consider participating in the new-issue market to take advantage of potential attractive entry points for reinvesting.
Our tenured buy & maintain portfolio management team has an average of 28 years of investment industry experience. We believe our key to success has been our deep understanding of credit as well as close collaboration across our investment team, credit, quantitative and macro research analysts and traders. We have proprietary tools and platforms to construct, manage and effectively measure bespoke portfolios. We strategically partner with our clients through all phases of the portfolio providing ongoing, tailored and dedicated client service.
There are a variety of investment objectives that may prompt institutional investors to seek low-turnover, yield-focused investment strategies with long-term horizons and measured credit risk. We believe a buy & maintain strategy is a strong alternative for such investors because it can provide custom portfolios aligned with their guidelines, delivered with cost efficiency. Loomis Sayles’ approach to custom buy & maintain portfolios is differentiated by its seasoned professionals who create diversified portfolios underpinned by rigorous research.
Diversification does not ensure a profit or guarantee against a loss.
This article is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. Other industry analysts and investment personnel, including those within Loomis Sayles, may have different views and assumptions. Investment recommendations may be inconsistent with these opinions. There can be no assurance that developments will transpire as forecasted and actual results will be different. Data and analysis do not represent the actual or expected future performance of any investment product. We believe the information, including that obtained from outside sources, to be correct, but we cannot guarantee its accuracy. This information is subject to change at any time without notice.
Past performance is no guarantee of future results.
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