Our unique investment process
At Stratton Street we have a four stage process to determine which credits we will invest in
Identify creditor nations as defined by their Net Foreign Assets
At Stratton Street, we have a rather unique view of the fixed income universe. Rather than divide the world between developed and emerging markets, at Stratton Street we believe it makes more sense to separate creditors from debtors.
Countries are screened by their ability to repay debt, using Stratton Street’s net foreign assets (NFA) model.
Investing in fixed income based on index weights simply means having to buy more of a country or company’s debt as it becomes more indebted. Our approach screens out the countries that are dangerously indebted, so our funds have never invested in Greece, Spain, Portugal or Ukraine. Instead we have invested in the wealthy countries that in net terms are creditors internationally, not debtors. These countries include Germany, China, Norway, the Netherlands, Abu Dhabi, Qatar and Korea.
Use our macro analysis to determine our duration and credit quality positioning
We have a strong macroeconomic focus across our portfolios, as a results of the fund manager’s macro backgrounds. We believe it is important to be positioned correctly in terms of your credit duration and credit quality depending on what stage we are in the economic cycle.
Look for undervalued, investment grade, liquid credits using our proprietary Relative Value Model
20 Years ago, we developed our proprietary relative value model which can calculate the fair value of over 9000 bonds at any one time. Once we’ve established which credits look most attractive we exclude any issues which are:
- From countries any which have NFA at -50% + of GDP
- Less than $500 million in issue size
- Non-investment grade
We also tend to favour sovereign and quasi-sovereign credits (with over 80% exposure).
We are then left with credits which look to be undervalued and have the potential to deliver strong returns.
Now, these credits look attractive, but we then have to determine WHY they would be trading so cheaply.
*Except one strategy which allows for up to 20% non-investment grade exposure.
Undertake credit analysis on attractive opportunities
The final stage of our analysis is to look at each of our undervalued credits in depth, and to establish if they are trading competitively for a perilous reason or if in fact it is as a result of bond market inefficiency. If, after extensive research, we deem the credit to be safe, only then we will choose to invest.