Sponsored by Voya Investment Management
Facing the uncertainty of the global macro environment requires a firm that can look broadly to assess current opportunities and risks.
We spoke with Matt Toms, Chief Investment Officer of Fixed Income for Voya Investments about his team’s three step process that combines a qualitative and quantitative approach to find the best total return opportunities while managing the upside versus downside. Toms noted several core tenets that the team utilizes, including diversity of perspective, which Voya believes creates an information advantage, and a culture of collaboration that includes cross sector dialogue.
What are the benefits of a multi-sector approach?
Our multi-sector approach allows us to cast a wider net with access to greater total return opportunities across the bond market. This flexibility also allows us to assess where there is attractive upside but also a margin of safety to help protect on the downside, driving better value and potentially consistent returns over time.
What is Voya’s three-step process?
First, we assess the macro environment. All of our 160 fixed-income investment professionals feed into our macro view which acts as a global radar. This overarching macro view helps to identify key upside and downside risks within the global economy, and ultimately informs our overall level of risk taking within portfolios.
Step two uses our macro view to develop an optimal risk allocation, including overweight and underweight positions at the sector level. We believe relying on fundamental views versus making broad macro bets results in strong, risk-adjusted results. Investors will not see significant interest rate calls defining performance in most of our strategies.
Step three is to have the broad teams choose individual securities within their sectors. We need those experts, as opposed to one portfolio manager choosing all bonds across all sectors. When choosing individual securities, awareness of the macro environment helps us be better informed about risks germinating outside their specific sectors. The information sharing makes our security selection better.
How do you balance the quantitative and qualitative approach?
We were early adopters of the quant research evolution as we wanted to use every tool possible to inform our dialogue. We use quantitative tools to assess business cycles, economic growth outlook and market valuation over many cycles. Ultimately, we try to assess what we think forward correlations are going to be and use this analysis to better inform both our individual sector teams and multi-sector portfolio managers in assessing where to allocate risk.
How does Voya manage investment risk?
We start with a strong desire to understand and manage risk in our portfolios with heavy skepticism that any individual tool can provide a perfect holistic overview. We look at many different vectors such as tracking error, VaR and scenario analysis. We use a host of risk systems to do this, both off-the-shelf and proprietary.
We also look at portfolio risk from a nominal or percentage exposure to different sectors and their duration exposure to different components of the bond market. Risk management in Fixed Income investing is critical given the substantially greater degree of downside risk relative to upside opportunity in individual bonds. Said another way, it is more value to figure out that you are wrong sooner, than it is to be right.
What is your view on Fed policy and how does it fit in with your macro themes?
Regarding Fed policy, we'd say that the world is looking too much at the central bank's role in the financial crisis and beyond.
The problem is the central banks have been in the lead role and have used monetary policy very aggressively, to a certain extent, it's looking long in the tooth, not exhausted but nearly exhausted. The Fed policy of lowering interest rates is losing some of its efficacy. It still has benefits, but lower rates have headwinds too. We don't think political pressure is helpful. It's always been there but it's much more outspoken today and adds to the uncertainty.
Where do you see opportunities and risks?
The macro-environment is challenging. The level of uncertainty is where we’re seeing the biggest change. Two factors that are creating the level of uncertainty are 1) international trade and 2) central bank rate policy and its effectiveness.
In this environment, we’re looking to stay away from global trade uncertainty and from investments that will be harmed if interest rates move, or stay, lower. US-centric risks that do well with lower interest rates and ones that are tied to the US consumer base real estate is where we’re focusing. Another opportunity is investment grade corporate bonds, particularly BBB rated issuers that are committed to de-leveraging and balance sheet repair. We think some of the fear in corporate bonds is overblown. It's alright to highlight the risks, but we're also seeing BBB corporate issuers begin to pay down debt and respond to market concerns about increasing leverage.
Overall, we’re much more cautious on things tied to international growth like emerging markets. We've been more cautious on financials and banks as the unintended consequences of lower rates hurting financial systems is another offset to the effectiveness of monetary policy, and so all else equal, our long-held preference for financial institutions and banks has been whittled down in this environment.