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The Value of Independent Research

In the current unsettled times, with the financial and banking sector braced for more active and aggressive regulators and possible sweeping changes to operating models, the issues associated with reliable investor information and recommendations appear more relevant than ever. It is not that transparency from issuers is being brought into question, though it seemingly is. It is the murkiness with which the wider advice and investment industries have submerged themselves over the past several years that push forward the hot topic of trustworthiness, including advice within the scope of ‘best interests’.

To this point, a wider discussion on information and research within the financial and banking sectors feels apt. Just as there are structural advantages in fixed income markets which give active managers a performance edge, there are strategic advantages in using rigorous, outsourced research. Despite the premise that fixed income is sold as the ‘safe’ portion of a portfolio (which based on comparable volatility vs. equities is true), there can be vast differences in performance when comparing a well-researched fixed income portfolio with the wider market.

That the fixed income market is wired differently to the equities market should be self-evident, but is explored a little more thoroughly in the below two charts.

Figure 1. BondAdviser Security Recommendations (2014 – 2018)

Source: BondAdviser, Bloomberg

The first shows our total number of security recommendations through a period of around three and a half three years and broadly between late 2014 and early 2018. Over 95% of our recommendations fall into Buy, Hold or Subscribe buckets. It is very rare that we assign a ‘No Subscribe’ recommendation, instead choosing to only focus on investment grade names or higher-yielding issuers that after performing detailed research on, we are convinced are good value for risk.

Figure 2. Average 1-Year Returns by Recommendation (2014-2018)

Source: BondAdviser, Bloomberg

The second chart shows the average 1-year return post a recommendation being given. This does mean that a given security can be included more than once in any given year, for example if we are updating our reports twice a year for reporting periods or if we are making more tactical recommendations following important news flow or significant price moves.

Clearly, our Subscribe recommendations are delivering superior returns for our subscribers and clients. Our Buy recommendations are also performing very well and our Holds are mostly comprised of investment grade credits, which naturally offer lower returns in this low-rate environment. Given the nature of fixed income investments (markedly different to equities), we have to be quite convinced that a Sell recommendation is justified, generally where we are concerned over an issuer’s credit metrics or are anticipating reasonable spread widening (price declines). Even a deteriorating name will likely deliver positive returns due to coupon payments and the pull-to-par effect as a bond approaches maturity.

BondAdviser’s research recommendations are based on expert analysis of a range of qualitative factors (operational performance and economic trends) as well as quantitative factors (historical and projected credit metrics and peer comparisons). Our transparent reporting of valuable information simplifies an otherwise complex procedure into an easily recognisable recommendation scale (Buy, Hold or Sell) coupled with our view of an Issuer’s ongoing Outlook (Improving, Stable or Deteriorating).

The key here is identifying these opportunities in a timely manner with thorough credit research and implementing the recommendation within a broader portfolio context (i.e. core-satellite framework). This simplistic yet effective approach will allow investors to take advantage of company/sector specific risks and generate excess return, which is always attractive in a persistently low interest rate environment.

We previously discussed active versus passive investing strategies and returns and then extended this into specific examples of tactical changes in our views and how we can strongly drive alpha (excess) returns.

Given the genuine uncertainty in the interest rate environment, we expect BondAdviser to continue its demonstrated trend of success in combining rigorous research and active management, allowing our subscribers to make intelligent investment decisions.