The fixed income portion of our portfolio aims at producing income. This portion is not aimed at creating strong capital gains, but rather at steadily growing the portfolio while giving the opportunity for our partners who wish so to receive regular dividends. It is the sole source of growth when equity markets are expensive or falling (phases 3 and 4).
We focus on corporate high yield bonds, and exploit inefficiencies created by market structure. For instance, rating agencies cannot give an issuer a rating higher than the rating of the country where the issuer operates. Thanks to this rule, some high quality companies with outstanding financials and strong business franchises receive ratings lower than what their intrinsic value suggests. As a result, their bonds yield more than they should, providing investors with an attractive risk adjusted return. In the current low rate environment, our aggressive fixed income portfolio yields around 8% in USD.
Exploiting Structural Inefficiencies
We do not analyse business cycles for this strategy, as the aim is not growth but income. We are constrained to allocate funds as they arrive, and thus we cannot wait for favorable valuations. However, we tend to invest in out-of-favour countries or industries, taking advantage of structural market inefficiencies and of pessimism about certain sectors / countries in order to buy bonds of leading companies in these sectors / countries.
This portion of the portfolio stays invested 100% of the time, including through crisis. As a result, companies we select must be able to survive through crisis without defaulting. We thus tend to choose leaders in their sectors, with high quality businesses, outstanding financials, low debt / assets ratio and high interest coverage ratios. We focus mainly on companies with a good asset base that produce solid cash flows relative to their indebtedness.
Experience in a Wide Range of Environments
Our track record includes profitable investments through revolutions and wars, even though this is not the type of environment we favour for our investments.