Meet the Manager: Understanding Active Fixed Income with Sean Dranfield

[00:10]

We’re a Chicago-based bond fund manager. We cover all domestic bond sectors in the U.S. We manage roughly $10 billion in total assets. We’ve been around since 2008. And the thing that really sets us apart is we have a very different way of looking at bonds. It’s called shape management. It’s more of a math-based approach, but it really sets us apart from other bond fund managers.

[00:35]

So we have a very different way of looking at bonds, and the premise really is around this notion that there are traditional bond metrics that people look at that we really think can lead bond managers astray. And so I would put those into sort of two buckets. The first is this idea that anybody can predict interest rates. And as you may know, interest rates are the primary driver, or one of the key drivers, of bond prices. And there’s overwhelming evidence that no one can predict interest rates, so we do no rate predicting. And instead, we try to build more of a steady, rate-agnostic portfolio.

[01:10]

And then at a more granular level, when looking at bonds, I would sort of distinguish: there’s a pretty stark difference between bonds and equities. So when you think of a bond or equity market investing, with an equity, I may read some research that predicts what Google’s price would be or their dividend would be, but I don’t know. It’s a prediction.

[01:34]

A total return that’s also related to both income and price, but it’s knowable. It’s mathematical. So unlike a dividend with a stock, a bond’s coupon is a contractual obligation. So it’s known. I may not know what future interest rates will be, but if you tell me what rates could be, I can tell you to the tenth decimal place how a bond will price. So price is also knowable, but it’s a math-based approach to looking at bonds.

[02:00]

So we have this very different sort of granular mathematical way of looking at bonds on a bottom-up basis, and we do no rate predicting on a top-down basis. And that’s really sort of what sets us apart.

[02:18]

So firstly, I think there’s a strong case for active management in the fixed income market. If you look at the evidence, there’s pretty strong evidence that active managers can fairly consistently beat indices in bond markets. I think there’s also a case for an ETF over a fund because clearly ETFs are sort of the product of the future. Like, they offer more transparency to clients. So, you know, when we had the choice to consider a mutual fund or an ETF, we just took the view that ETFs are the way the market is going. So why not participate in that space?

[02:50]

And then I think from a European perspective, what we offer via our investment methodology is a much more rate-insensitive approach. And I think that really complements more traditional bond managers, who tend to make interest rate bets, and they tend to have much more of an interest-rate-sensitive total return. So we can really complement a more traditional bond fund, whether it’s passive or active, by virtue of the fact that we’re going to be more of a smoother ride than a typical traditional bond fund.

[03:26]

So firstly, I think there’s a strong case for active management in the fixed income market. If you look at the evidence, there’s pretty strong evidence that active managers can fairly consistently beat indices in bond markets. I think there’s also a case for an ETF over a fund because clearly ETFs are sort of the product of the future. Like, they offer more transparency to clients. So, you know, when we had the choice to consider a mutual fund or an ETF, we just took the view that ETFs are the way the market is going. So why not participate in that space?

[04:00]

And then I think from a European perspective, what we offer via our investment methodology is a much more rate-insensitive approach. And I think that really complements more traditional bond managers, who tend to make interest rate bets, and they tend to have much more of an interest-rate-sensitive total return. So we can really complement a more traditional bond fund, whether it’s passive or active, by virtue of the fact that we’re going to be more of a smoother ride than a typical traditional bond fund.

[04:36]

We’ve talked about shape management a little bit. So the way we think about shape management is, I talked earlier about this idea that we can’t predict rates. So when we think about bond selection, what we’re really doing is saying, let’s free ourselves from rate prediction, but let’s build a bond portfolio that has complementary shapes.

[04:54]

And what I mean by complementary shapes is a total return that might help an investor in a rates-down environment, and combining that with a bond that might help you in a rates-up environment, and having a balance between offense, the bonds that help you if rates go down, and defense, the bonds that help you when rates go up, and combining those two with this idea that rates are unpredictable.

[05:18]

We’re really trying to look at bonds in a very different way, but provide investors with a more consistent, steady-eddy type of return, irrespective of the top-down pressure or headwind or tailwind from interest rate movements.

[05:36]

Our flagship portfolio in the U.S. has been around for 15 years. So I can look to that 15-year history to get a sense of how this methodology does in different types of environments. And what the methodology has shown over time is it delivers a fairly consistent outcome relative to both the index and competition. So we consistently win over the long term.

[05:59]

We may underperform if rates were to go down violently over a short-term period, but in that environment, clients will also get a really nice total return. So the methodology is mathematical, it’s repeatable, it’s objective, and over time it’s delivered very strong results.