Oechsle International Advisors
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BACKGROUND
Oechsle International Advisors, LLC (Oechsle International) is the successor entity to Oechsle International
Advisors, L.P., an international investment management firm that was formed and registered with the
United States Securities and Exchange Commission (the “SEC”) in August of 1986 by a group of
investment professionals who previously worked as a team at Putnam International Advisors. Oechsle
International Advisors, LLC was formed and registered as an investment adviser with the SEC in October
1998. The founding principals of Oechsle International Advisors, L.P. have worked together for an average
of seventeen years. Oechsle International currently manages in excess of $20 billion on behalf of
institutional and individual investors and registered and unregistered investment companies throughout
North America.
Oechsle International Advisors, L.P. began managing international portfolios for U.S. tax-exempt clients
shortly after the establishment of the firm in 1986. The Oechsle International team, however, developed its
management approach while at Putnam, initially applying their strategies to mutual funds (1973) and
eventually to U.S. tax-exempt clients (1979).
Oechsle International Advisors, LLC (“Oechsle International”) is a Delaware limited liability company. Its
Member Manager is Oechsle Group, LLC, a Delaware limited liability company. Four individuals, all of
whom are involved in portfolio management, research analysis and/or administration, manage Oechsle
International.
S. Dewey Keesler
Stephen P. Langer
Sean Roche
Warren Walker
CIO & Principal/Portfolio Manager & Research Analyst
Principal/Director of Marketing & Client Servicing
COO & Principal/Portfolio Manager & Research Analyst
Principal/Portfolio Manager & Research Analyst
An additional eleven members of the firm hold equity investments in the firm. 56% is owned by active
employees. The remainder of the firm is owned by Fleet Financial Group, Inc.; Hellman & Friedman, a San
Francisco-based investment banking firm; a member who retired in 1999; and a member who retired but is
currently providing consulting services to the firm.
Oechsle International, headquartered in Boston, Massachusetts, has three additional research and
management offices.
Location
Boston
Accounting,
(headquarters)
Function
Research, Portfolio Management, Trading,
Legal / Compliance, Client Servicing, Marketing
Frankfurt
Research, Portfolio Management, Client Servicing
London
Research, Portfolio Management
Tokyo
Research
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International / Global Fixed Income
Investment Philosophy
Oechsle International Advisors believes that bond market returns are highly affected by currency trends.
Therefore, to add value in the global bond markets, one must consider bonds and currencies to be at least of
equal importance. The best way to identify investment opportunities is to combine country/currency
decisions, active duration decisions and quantitative risk programs used as a control mechanism. This
blend of disciplines leads to superior long-term performance.
Investment Style
We are research-driven bond managers, focusing much of our time on fundamental macroeconomic study of
the world’s major bond markets. We actively allocate among countries and currencies, and utilize the
complete spectrum of the yield curve. For example, when we’re positive on a bond market and its currency,
we will invest in long-dated maturities. The less positive we are, we purchase shorter-dated, less volatile
issues. We also seek to reduce the overall risk in the portfolio by:
- diversifying across a number of markets;
- hedging unwanted currency exposures during times of base currency strength;
and
- applying quantitative techniques.
Investment Process
Our investment process begins with extensive fundamental research on the macroeconomic environments of
global fixed income markets. This research effort relies on both internal and external resources. Our
Frankfurt-based fixed income team, led by Astrid Vogler, head of global fixed income, coordinates its
research activities with our research offices in London, Boston and Tokyo. The fixed income team is in
regular contact with its associates worldwide discussing capital market conditions. The fixed income team
provides the equity team with valuable insight on how currencies and interest rates impact equity markets
and the equity perspective is very useful for the fixed income team. These teams meet on a formal basis
each quarter and communicate informally on a more frequent basis.
Our team also accesses external resources, such as government officials, central bankers, brokers and other
major financial institutions. We firmly believe in meeting with these people face-to-face, and travel
extensively to witness market developments first-hand. Frankfurt is a particularly strategic location for
global fixed income investing, as many of the world’s major bond markets are located in Europe and thus
highly accessible. Also, it’s relatively easy to deal both with the Far East and North America during
working hours.
Our research focuses on variables that drive currency and bond movements, such as the rate of inflation,
government budget balances, trade balances, monetary policies, and general economic conditions of the
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individual countries. The objective is to determine consensus thinking on the markets and identify where
our thinking deviates. This is where opportunities for incremental returns originate.
The objective of our macroeconomic research is to identify key trends within individual markets and across
markets. The primary trends we focus on relate to interest rates and the U.S. dollar.
1. Interest rates: Obviously the main factor in fixed income investing. The key determinant here is the rate
of inflation. The outlook for inflation rates often defines markets as attractive or unattractive. We focus on
markets with attractive real yields (bond yields less inflation) and positive inflation trends. A good
example in the past was Japan. Here is a market that had low absolute bond yields, yet had an attractive
inflation scenario, causing rates to drop even further, and bond prices to rise.
It is not the level of interest rates that is important, but rather the direction of interest rates and the level of
inflation. The best scenario for bonds is declining rates and stable or declining real yields. We rank markets
according to their likelihood of realizing this optimal scenario. Again, it is important to look at our
expectations vs. consensus expectations, and identify where we differ.
2. The U.S. dollar: The U.S. dollar is the world’s most dominant currency and the primary reserve
currency closely followed by the deutsche mark and yen. All major currencies are measured relative to the
dollar. Thus, it is critical to watch factors within the U.S. that impact the dollar: economic growth, rate of
inflation, and trade balances with America’s major trading partners. The key is analyzing these factors
with those of other countries, as this is what helps impact the movements of the dollar vs. other currencies.
Our currency committee carefully follows events which might impact movements in the dollar. Identifying
trends in currencies provide us with a significant opportunity to add value to our clients’ portfolios.
Once we’ve identified trends in interest rates and the dollar, returns are estimated and the appropriate
allocation to countries’ bond markets and their currencies is determined. Allocations are set quarterly on a
formal basis, but can be altered at any time should conditions warrant.
An important element of the allocation decision is setting the ideal duration for each market. Duration is a
function of maturity. Thus, we must determine where along the yield curve it is optimal to invest. The
further out in maturity, the more optimistic our outlook for a drop in yields and a rise in prices. We take
full advantage of all liquid maturities. The duration of bonds in the portfolio may be 10% - 200% of the
benchmark’s duration.
Although our process is predominantly qualitative, we do, however, apply quantitative techniques in the
country/currency allocation process to ensure that the structure of the portfolio represents our current views,
and does so within the risk guidelines of the benchmark. All quantitative techniques inherently suffer from
the fact that they are based on historic data. However, such techniques can assist by imposing discipline
and consistency onto the process.
The technique we use is referred to as “reverse optimization.” Under this procedure, our country and
currency weightings and the historic risk data of each market are entered. The output is implied market
returns. These returns are then compared to our expected returns, and adjustments are made as we see
necessary. This technique is non-traditional, and as such, it overcomes a good proportion of the limitations
commonly associated with traditional optimization techniques.
After taking the recommendations of this tool into consideration, the asset allocation of the portfolios is
then set. Typically we invest across 8-12 markets, and typically follow the criteria set out below:
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Major market weightings: +/- 50% of index weighting
Other markets: no single market more than 12% of the portfolio
The goal is to provide adequate diversification across markets to reduce risk, yet to concentrate on those
markets and currencies that we think offer the best potential for incremental return.
In order to implement our asset allocation strategy, issue selection becomes important. At this stage, we
focus on the type of security we wish to purchase. This is typically a government bond, but can also be a
government agency issue, supranational, mortgage debt, or corporate debt, and can be of varying coupons.
The tenet we adhere to most strictly is credit quality: no bond rated below single-A (very high quality) as
per Moody’s or Standard & Poors, the most reliable rating services in the business is included in the
portfolio. We also pay careful attention to diversification and liquidity: we typically hold 20-40 issues in
the portfolio, we do not hold more than 5% of any one issue, nor do we purchase a security that was part of
an issue of less than $500 million. Again, the goal is to implement our strategy with conviction, but to do
so in a risk-conscious manner.
Should any client have specific restrictions, we review those at the security selection level. We pay close
attention to client concerns, and are flexible in accommodating their particular requirements. Should a
client want to establish guidelines outside of the ones under which we typically operate, we would be more
than happy to discuss accommodating them.
In evaluating where we seek to add the most value, we focus on the country/currency decision. The
duration (yield curve) decision ranks of equal importance. Security selection within our above-mentioned
framework is of secondary importance.
Sell Disciplines
We look to sell issues, currencies and/or markets when one or more of the following events take place:
1. Rising interest rates: typically a result of rising inflation, bonds’ worst enemy;
2. Tightening monetary policy: results in higher rates; and
3. Base currency strengthening.
Currency Hedging
A significant contributor of return and risk in the global fixed income markets is currency. We will hedge
for both strategic and tactical purposes. Strategic hedging is done defensively back into the client’s base
currency during periods of base currency strength. Tactical hedging is done opportunistically to add value
in the form of cross hedging: hedging between two currencies, neither of which are the client’s base
currency.
We only use forward contracts to implement our currency hedges. These instruments are the most liquid
traded in the world. 3 to 6 month contracts are most commonly employed. We find it unnecessary to
implement our strategy through the use of futures and options. Outside of forward contracts, no derivative
instruments are used in our process.
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