- Rockwood Capital employs a consistent team-oriented approach to fixed income portfolio management, research and trading. Our philosophy focuses on the evaluation of various risk premiums, with an emphasis on real yields. While numerous technical factors contribute to short-term swings in bond prices, we believe the fundamental value of any fixed income asset is primarily a function of trends in inflation and inflation expectations. As such, we focus on the root source of inflation trends — monetary policy. In many ways, our research techniques parallel those utilized by the staff of the U.S. Federal Reserve.
Process
Our investment strategy utilizes a combination of both top down and bottom up analyses in the formulation of our investment decisions. We employ a disciplined valuation process and gradually adjust the interest rate sensitivity, maturity structure, and sector allocation of portfolios to preserve the real purchasing power of invested capital and enhance long-term total returns. Junk bonds, derivatives and currency bets are not our style. We firmly believe that exceptional long-term performance can be attained without sacrificing quality. We also recognize that high quality bonds offer superior diversification relative to equity investments. For every client portfolio we consistently maintain a superior risk profile in terms of credit quality, liquidity, and stability of cash flows. A systematic, five-stage portfolio modeling and risk management process is employed.
First, we utilize a combination of our economic outlook, fundamental factors and technical analysis to determine the optimal duration position of portfolios relative to appropriate client benchmarks. Based on our outlook for interest rates we gradually adjust the interest-rate sensitivity of portfolios within specified ranges to preserve principal and enhance long-term total returns. Portfolios tend to be fully invested at all times, with cash reserves targeted at 5% or less of net assets. Duration is generally maintained in a range within 30% of the appropriate index.
Second, we perform Yield Curve Analysis to effectively manage the diversification of portfolios across the maturity spectrum. Recognizing that interest rate movements rarely occur uniformly among short, intermediate and long-term securities, we utilize sophisticated “what-if” modeling techniques to evaluate the performance potential of alternative maturity distribution structures (bullet, barbell, etc). Our analysis incorporates a thorough review of yield differentials and roll characteristics across segments of the yield curve.
Third, we turn to Yield Spread Analysis to identify market sectors offering strong relative value, subject to our strict risk management standards. When justified by incremental yield premiums relative to government securities, allocations are maintained in investment-grade corporate debt, mortgage pass-throughs and asset-backed securities. Rigorous option-adjusted spread analysis is employed to evaluate risk premiums relative to alternative cash flow patterns and volatility characteristics. We also employ linear “rich/cheap” analysis to identify individual Treasury securities offering attractive yields relative to implied forward rates.
Fourth, Credit Analysis is applied as the principal means for individual security selection. We seek to identify specific investment-grade issuers displaying stable or improving financial characteristics and minimal exposure to default and event risks. We subscribe to Egan-Jones Credit Ratings Services and CreditSights for the fundamental credit research. We use BondEdge to track our credit spread duration by sector relative to the index. We add those names whose credit metrics are above those of their peer group and in the sector expected to outperform based on our outlook for the economy and interest rates. We remove those names in sectors that our analysis expects to underperform.
Finally, Liquidity Analysis is performed to ensure that all trading activity is executed in a timely and efficient manner with minimal transaction costs. Only highly marketable, publicly traded securities are considered, and all transactions are implemented through a disciplined competitive bidding process. Every trade is awarded based solely on the criteria of best price. We also rely extensively on block trading techniques to execute shifts in portfolio structure simultaneously across client accounts having similar guidelines.