Steering one of the biggest and most successful unconstrained bond funds through a pandemic has led Guggenheim Investments to draw on a blend of behavioral finance and battlefield strategy. In fact, the $260 billion asset manager built its portfolio management team on a foundation of behavioral finance, says Anne Walsh, the chief investment officer for fixed income who co-manages Guggenheim’s Total Return Bond Fund (GIBIX).
“Good investors recognize their inherent weaknesses and try to drive them out of their investment processes,” says Walsh. “If we’re not aware of those traps in today’s unique investment environment, we can fall into them.”
The $21.9 billion GIBIX has returned 12.91% this year through November 12, according to Morningstar, easily outpacing the fund analyzer’s fixed-income category, which returned an average of 6.36% for 2020 through November 12, and Morningstar’s comparison index, the Bloomberg-Barclays U.S. Universal Total Return index, which has returned 6.44% for the same time period.
Walsh says Guggenheim established its investment processes based on the work of Daniel Kahneman, whose book Thinking, Fast and Slow laid the groundwork for behavioral finance. In that book, Kahneman divided human thought processes into “Type 1,” or automatic, instinctive, emotional and “fast” thinking, and “Type 2,” organized, process-driven and slower thinking.
“We’ve set up our investment process to drive out system one behaviors while keeping in our system two behaviors,” Walsh says.
In traditional asset management, investment committees are built using what Walsh calls a star system, where decision-making flows through the hands of a single “star” portfolio manager. In Guggenheim’s case, that would be Walsh herself or Scott Minerd, the company’s chairman and global CIO. But Guggenheim takes more of a decentralized team approach to managing its funds.
The areas of portfolio management and decision-making are broken down into component parts for different individuals’ responsibilities, and then those are designated to independent teams, which are organized around their areas of best knowledge. “Ultimately, it has served to slow down our decision-making,” Walsh says. “We have different teams making recommendations based on whatever component part of the investment process they’re engaged in. For example, we have a macro team that develops the house view with regard to our economic outlook, GDP and Fed policy, and that creates our road map for the future.”
Sector teams focus on areas like corporate credit, structured credit and other types of fixed-income instruments, Walsh says. Portfolio management decisions are divided between two groups—one responsible for portfolio construction, and the other for things like ongoing risk management, risk budgeting and model allocation functions.
Guggenheim’s teams do not always see eye-to-eye, which is a good thing, Walsh says, because it helps the asset manager avoid groupthink. But how did an approach intended to slow down the investment process impact Guggenheim’s ability to make decisions during the coronavirus pandemic’s more volatile days? Walsh says that while the firm’s process may sound complex and inefficient, Guggenheim has embraced some battle-tested tactics to make sure it can be responsive when necessary.
“I struggled for a long time on the best way to describe our team construct, because it can sound chaotic to some,” Walsh says. “I was introduced to a book by Gen. Stanley McChrystal called Team of Teams.”