Fixed income Presentation Summary.
Andre Roberts, CFA
The session “Fixed Income Evolution and Approaches” presented by Graham
Neilson, Cairn Capital was certainly worthwhile attending. With me being an
Equity portfolio manager, and the content being on credit market conditions
and approaches to recognising opportunities in the riskier end of credit assets,
the session was a great chance to broaden my scope of vision.
Graham gave his perspective on macro conditions, observing that the last
twenty years have been punctuated by a sequence of leverage builds
(bubbles), deflation (bursts) and policy responses. The most recent case
being building of leverage in Developed Markets balance sheets, deflation
due to the credit crisis and policy response to take leverage back to “normal”.
However the deleveraging creates stresses where the debt stock is highest
and where there are the least policy options … Europe. In doing so,
opportunities can emerge: highly rated credit (cash, govvies and investment
grade bonds) get crowded out and return expectations are squashed; lower
credit assets (subordinated financials, CLO Equity, Loans, RMBS, CMBS)
have their return expectations blow out and represent a potential “value
pocket”. Graham offered a framework for assessing characteristics of each of
the asset types in this value pocket. These stressed assets offer (arguably)
the best risk-adjusted returns in fixed income.
The session also provided a fresh approach (at least, to me) on assessing the
market’s pricing of an event using scenario analysis. The case study
presented was the probability of a Euro-zone break-up. Considering the
Eurozone outcome as having a number of scenarios – Recovery, Big Stress,
Single Ext, Multiple Exit, or Full Break-up – and assigning a market implication
to each scenario, the current market state can indicate an implied probability
of each scenario. Using these assumptions, a big probability tree can be built,
providing a valuable framework to assess the many moving parts in this case.
Clearly, the approach is heavily dependent on assumptions, and getting the
timing right on outcomes being realised will always be tricky, but nonetheless
scenario analysis is a valuable framework to consider how the many
outcomes (the limbs of a probability tree) are related.
The session was well attended and, as Graham presented the material
effectively, no doubt many in the audience appreciated the opportunity to
learn about something from out of the square.