Our team at Shelton Capital Management looks at each fixed income security with a multi-dimensional view. Is it a good credit or a bad credit? Is it improving or deteriorating? And is it expensive or cheap? If an issue looks undervalued and improving in quality, we’ll probably want to own it. Beyond the long position, as an active manager, we also put all this good analysis to work on the short side. We think the ability to short situations we believe are headed in the opposite direction, overvalued and deteriorating, is critical for a bond strategy to outperform over the long term.
Distinguishing whether a manager is active or passive is based on how much of their portfolio is in an active share that’s different from the benchmark. To really add diversification to a portfolio, we believe the investment strategy should have at least 50% allocation to sources other than the benchmark. If a manager claims to be active, but 85% of the portfolio replicates the benchmark, the portfolio is nearly just a closet index.
Nobody Said It Was Easy
Bond managers need tools to accurately measure the risk and return metrics of their combined portfolio positions; when those measures change, managers need to be able to change with them. It takes work, but for managers willing to roll up their sleeves and do the analysis, we believe there exists ample opportunity to increase the active share of any portfolio.
An active management approach allows a manager who’s able to grasp the interaction between interest-rate and credit cycles to make better decisions about which way to lean as an active decision. It’s the best way we know to outperform in the fixed-income space over time.
Guy Benstead is a portfolio manager for the Shelton Tactical Credit Fund.