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.