Steering one of the biggest and most successful unconstrained bond funds through a pandemic has led Guggenheim 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, said Anne Walsh, 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,” said 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 11.93% year-to-date, according to Morningstar, easily outpacing its fixed income category, which returned an average of 6.01% year-to-date, and Morningstar’s comparison index, the Bloomberg-Baclay’s US Universal Total Return index, which has returned 5.97% year-to-date.
Walsh said that 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,” said Walsh.
While 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 – which in Guggenheim’s case would be herself or Chairman and Global CIO Scott Minerd, Guggenheim takes more of a decentralized team approach to managing its funds.
Areas of portfolio management and decision-making are broken down into component parts representing individual responsibilities, and then those responsibilities are designated to independent teams. Teams are organized around their areas of best knowledge.
“Ultimately, it has served to slow down our decision-making,” said Walsh. “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 roadmap for the future.”
Sector teams focus on areas like corporate credit, structured credit and other types of fixed income instruments, said Walsh. Portfolio management decisions are divided between two groups – one responsible for portfolio construction, and the other responsible for ongoing management like risk management, risk budgeting and model allocation functions.
Guggenheim’s teams do not always see eye-to-eye—which is a good thing, said Walsh, because it helps the asset manager avoid group-think.
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 said that while Guggenheim’s process may sound complex and inefficient, the firm has embraced some battle-tested tactics to make sure it can be responsive when necessary.
“I struggled for a long time on best way to describe our team construct, because it can can sound chaotic to some,” said Walsh. “I was introduced to a book by (former JSOC Commander) Gen. Stanley McChrystal called ‘Team of Teams.’”