Fixed Income Diversification with LODI

Loi is subadvised by SLC fixed income. These are institutional money managers who manage a significant amount of money in that specific channel as far as fixed income markets go. And from an interest rate risk standpoint, Loi is actually very simple.

There are two major ways you are going to be able to essentially find value as far as an actively managed fixed income portfolio goes: duration management and then the credit selection as far as the sector exposure of the overall portfolio. Interest rate risk is handled very simply. Loi actually seeks to just match the duration of its benchmark, which is the Bloomberg one to three-year government credit index.

So, as far as duration management goes, it is very expected to be anywhere from one and a half to two years over the long term, towards the short end of the curve as far as that goes. But where a lot of its exposure is found as far as the credit bucket goes is in investment grade, but specifically in that single A to triple B bucket primarily split between corporate credit and securitized debt as well. Think asset-backed securities, commercial mortgage-backed securities, and collateralized loan obligations, so CLOs.

As far as the selection process goes, this is a bottoms-up fundamental strategy where the team is looking for positive spread opportunities, particularly within the securitized markets as well as corporate credit. So, for example, if we looked at the asset-backed security exposure of Loi's portfolio, most of it is expected to be in that triple B bucket as I mentioned earlier, but over the life cycle of holding these different types of securitized bonds in the ABS sector, you have the potential to benefit as those bonds near maturity from credit migration.

So maybe they bought it when it was a triple B-rated bond, but maybe when they sold it or the bond matured, this, hypothetically speaking, could potentially be single A or double A as far as the overall credit rating goes. So theoretically, that's how they are looking to add value in the portfolio and capital appreciation potential and current income potential as well, because securitized debt tends to offer a pretty attractive yield relative to their corporate credit counterparts.

As far as the overall allocation preference, there are two different investor types for a strategy like Loi. One is potentially that cash-plus investor. Naturally, there are risks as far as duration and credit risk goes, but for those looking to step out a little bit further onto the curve and take on a little bit more credit risk, there could be an attractive yield case there relative to that of a typical money market-like strategy. Then the other way is naturally in the core part of a portfolio. So we like to think of Loi as really this core-plus strategy on the short end of the curve, where there's a really nice diversification potential with this strategy as well.

For instance, the Bloomberg aggregate bond index, which is typically viewed as the S&P of fixed income land, doesn't have CLO exposure. It barely has ABS exposure and CMBS exposure. So LOIC could potentially be a nice diversification value add there as far as the fixed income allocation goes.