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We believe investors should be compensated for the risks they take — in all market environments and any investment strategy.
Overview
More Than Just Income
Investors’ focus on income with high yield bonds may cause them to overlook the importance of price appreciation. We built this strategy to complement income with capital growth, by identifying relative value opportunities and minimizing defaults based on both top down and bottom up research.
Compelling Risk-Adjusted Returns
Diversified Risk Exposure Compliments Portfolio Construction
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Principles of Investing
Focus on Consistency – Avoid Large Concentrated Bets
When the bond markets experience turmoil the top performing managers have historically taken a hard hit likely due to large bets across various sectors or duration. Diversifying your sources of return may be critical to providing more consistent outcomes.
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Percent of Top Quartile Managers That Declined in Peer Rank After a Credit Event in the Market
Source: eVestment, FRED, Northern Trust Asset Management. Data from January 1, 1993 to June 30, 2023. Credit events are defined as quarters where the absolute % change in 10-Year Treasure yield is greater than the average +1 standard deviation. A decline in peer rank is defined as a decline in the trailing 1-year return peer rank from the quarter end before the credit event to the quarter end of the credit event. The analysis was conducted using the eVestment U.S. Core Fixed Income Universe. Historical trends are not predictive of future results.
Principles of Investing
We Favor Bonds That Increase Risk-Adjusted Returns
Bonds at the lower-end of the investment grade universe have historically offered higher risk-adjusted returns with minimal added default risk.
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Sharpe Ratio by U.S. Credit Quality (last 20 years)
Source: Northern Trust Asset Management, Morningstar Direct, S&P Global. Sharpe ratio data as of June 30, 2023. Market indices are used for the Sharpe ratio calculations: ICE Bofa AAA US Corporate TR represents AAA, ICE Bofa AA US Corporate represents AA, ICE Bofa A US Corporate TR represents A, and ICE Bofa BBB US Corporate TR represents BBB. Average default rates from S&P Global, Default, Transition, and Recovery: 2022 Annual U.S. Corporate Default and Rating Transition Study. A security rating is not a recommendation to buy, sell or hold securities. The rating may be subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of the other ratings.
Principles of Investing
Protect Against Defaults to Deliver Consistent Outcomes in Any Market
The risk-reward tradeoff between yield and risk needs to be consistently assessed and monitored, as the impact of even 1 – 2% in defaults can quickly erode any previous short-term yield gains.
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High Yield 3-Year Rolling Returns vs. Default Rate Since 1989
Source: eVestment, Northern Trust Asset Management. Data as of June 30, 2023. High yield is represented by Bloomberg US Corporate High Yield Index. Past performance is not indicative or a guarantee of future results. Index performance returns do not reflect any management fees, transaction costs or expenses. it is not possible to invest directly in any index. Indexes are the property of their respective owners, all rights reserved.
Principles of Investing
Favor Diversification Over Concentration
Portfolio concentration can add idiosyncratic risk that we systematically avoid by effective diversification that involves setting individual security weight constraints, diversifying by maturity, industry, sectors, countries and currencies.
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10 Year Median Peer Group Ranking — eVestment U.S. Core Universe
More Diversifed Strategies is defined as strategies that rank in top 50% of peer group universe for total number of holdings, Less Diversified Strategies are those that appear in the bottom 50% of the universe. Historical trends are not predictive of future results. Source: eVestment, Northern Trust Asset Management. Data as of June 30, 2023.
Principles of Investing
Avoid Speculative Derivative Bets That Increase Risk
We purposefully avoid esoteric securities and short-term speculative positions that can be costly during times of stress in order to avoid unintended outcomes that may occur with the increased complexity and risk.
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Median Manager Peer Group Ranking Return During 20% Market Corrections (eVestment U.S. Core Universe)
The use of derivatives was determined by a field in eVestment that asks if the manager uses derivatives in the management of the product. Historical trends are not predictive of future results. Source: eVestment, Northern Trust Asset Management. Data as of June 30, 2023.
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How It Works
Select Investments With Attractive Risk-Reward Profiles Versus Peers
Perform top-down, bottom-up research across the high yield risk spectrum
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How It Works
Align Credit Allocation With Economic Outlook
Set credit weights for optimal performance based on proprietary outlooks
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How It Works
Construct a Portfolio That Balances Income and Growth
Manage duration, yield curve and sector allocation purposefully while accounting for liquidity and credit risk
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How It Works
Trade With Efficiency to Exploit Opportunities and Mitigate Risks
Buy on improving fundamentals and relative value, sell on deteriorating credit quality and leverage our trading scale
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Portfolio
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Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTAM’s efforts to monitor and manage risk but does not imply low risk. This information is general in nature and should not be construed as tax advice. Please consult a tax advisor or professional as to how this information may affect your particular circumstance.
Not FDIC Insured | May Lose Value | No Bank Guarantee
Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
