Why unconstrained strategies don’t have to be higher risk


Payden & Rygel has come a long way since it set up shop in 1983. Back in the day it managed mainly corporate cash for US Fortune 500 companies. Now it is kicking goals, in Australia too, with a global absolute return bond fund.

The ‘Payden Global Income Opportunities Fund’, and associated bespoke mandates, came about from a discussion with a client which was looking for a stable return from its fixed income but with downside protection. This was prescient because that was in 2007, just prior to the GFC.

As an aside, Joan Payden, who sits on the 10-member investment policy committee, cashed in her 401k plan in 1983 to start the firm. She was a pioneer in cash-plus investing.

Brad Boyd, a senior vice president and member of the firm’s five-person investment strategy team, said on a regular visit to Australia last week: “As we consider ourselves a ‘solutions-based’ manager, we designed the strategy, which we could have done in various ways. The aim was a positive, stable and dependable return without too much downside… We have a lot of tools and we thought that 2-3 per cent above LIBOR is a reasonable return over a long period of time… But we will also build a bespoke portfolio with a specific target for investors, as we have done for Australia’s Sunsuper.”

The strategy can be dialed up or down, with big Queensland-based industry fund, which last week won the Chant West fund of the year award (see separate report) wanting a dialed-down version offering slightly more protection.

Payden & Rygel partnered with Grant Samuel Asset Management for distribution in Australasia in 2011 and the Australian firm also launched a separate fund for smaller (wholesale) investors which currently has about $600 million invested.

Grant Samuel also recruited a well-regarded fixed income specialist, Steve Miller, who had run big bond portfolios at both the old BT and the new BlackRock for many years. He is working two-three days a week at Grant Samuel helping clients with their strategies, with a particular focus on explaining Payden & Rygel’s capabilities and latest thinking on the markets.

Damien McIntyre, Grant Samuel chief executive, said at the time of Miller’s appointment that he would not rule out helping in the launch of an Australian fixed income product, although there was nothing on the drawing boards, but Miller said he had no desire to go back to the coal face of running portfolios.

In a separate interview, Miller said he was enjoying the freedom to look “beyond the daily noise” and think more deeply about trends and also to talk to clients about what they really wanted. “I spent many years glued to a computer screen all day long,” he said. “I think if I had my time over again, I would spend less time in front of the computer and more time talking to industry participants and clients.”

McIntyre said last week that one of the attractions of the absolute return strategy is that investors could choose from a big range of potential outcomes. “We wanted to be sincere as possible [with the fund]and have little chance of a loss over a 12-month period.

Unlike several other leading global absolute return bond funds, the Payden & Rygel strategy is not as concerned about duration risk. It is more concerned about looking into a company’s balance sheet for its credit exposures and studying what it is likely to get paid over time, as it does with fundamentals in emerging market debt and other higher-return instruments.

“The best risk-adjusted area is the first four years on the yield curve,” Boyd said. “You normally get paid incrementally more each year and then it tends to flatten out.” The firm tends to own bonds which are no more than three-four years to maturity.

The privately owned firm is based in Los Angeles, where there are about 170 staff, and has an office of about 20 in London and 10, mainly client service, in Boston.

The three main components of the absolute return strategy are:

  • a core of multi-sector securities including bonds, loans and securitized debt, which represents between 80-90 per cent of historic strategy returns
  • a tactical trading slice for positioning in rates, currencies and spread product, and
  • hedges to protect against extreme market conditions and dampen drawdowns.

As of April 30 the fund’s characteristics were an average duration of 1.82, a credit spread duration of 3.48, yield to maturity of 3.90 per cent, across 262 issuers of BBB- rating or higher. The manager classified the portfolio as representing 45 per cent “stability” and 55 per cent “opportunity”.

The firm and its Australian representative both believe strongly in active management across all asset classes, especially in the currently climate of fully priced bonds and equities and talk of too much money chasing too-few opportunities in infrastructure and private equity.

– G.B.