Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
The Reams Unconstrained Fixed Income strategy utilizes a flexible and benchmark-agnostic approach to portfolio construction and a broad investment universe that covers all liquid segments of the fixed income market, with a bias towards the United States. As a total return investor, we are constantly surveying our investment universe to determine the most attractive risk-adjusted returns available at any given point in time and actively allocate capital to those areas of the market. A key feature of our investment style is to react opportunistically to price dislocations and relative value opportunities, which is differentiated from many bond managers that seek to simply maximize yield by maintaining static exposures to higher-yielding spread sectors. The overall goal of the Unconstrained Fixed Income strategy is to maximize risk-adjusted total returns while limiting the possibility of negative returns and avoiding permanent impairment. In more concrete terms, the expected return over a full market cycle is USD LIBOR +200-400 bps and we seek to deliver these returns with low correlation to traditional bond indices.
The 13-member investment team is comprised of a 3-member investment committee led by CIO Mark Egan, who has been with the firm since 1990. The investment committee is responsible for setting top-down investment themes such as duration/curve positioning and sector allocations, while also incorporating input from the rest of the investment team. In addition to the investment committee, separate teams covering the corporate and securitized sectors are responsible for conducting bottom-up research and individual security selection within their respective coverage areas.
How have you been trying to weather the storm caused by the Covid-19 pandemic and what could be the longer-term implications for your strategy?
2020 was a tumultuous year that many of us, frankly, would prefer to forget. The COVID-19 black swan event was disastrous in many regards, to state the obvious, but the ensuing market crash and eventual recovery allowed Reams to do what it does best, which is to react opportunistically to heightened volatility and take advantage of price dislocations. I believe this backdrop allowed us to generate strong performance on behalf of clients across our entire range of products, including the Unconstrained Bond SICAV which had a return of +12.34% in 2020 for Class A (USD).
Despite the abrupt shift to a remote work environment, the investment team and support staff were also able to operate seamlessly. This was largely due to our disaster recovery protocols, which include testing remote functionality for all employees on a rotating basis. The investment team in particular continued to function smoothly, which was critical given the extreme market volatility and significant shifts in portfolio positioning that were occurring during that period. Due to the team's relatively small size and flat organizational structure, along with its continuity and many years of experience working together, we were able to move to a remote work environment with virtually no disruption.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
The current opportunity set is relatively unattractive in our view. Global interest rates are at low levels and the risk-reward tradeoff for holding any meaningful amount of duration is asymmetric. In addition, there is a very real possibility of further increases in rates as economies continue to reopen. Spread sectors do not offer much value either at this stage. There are pockets of opportunity in certain industry groups and individual names, but broadly-speaking, spread levels in the corporate and securitized sectors are very tight and offer minimal value.
For the time being we are content with steadily increasing liquidity as we patiently await a more robust opportunity set. As with any market dislocation or period of heightened volatility, we can never predict when or why these episodes occur, or even what the specific opportunity set will look like in the aftermath. What we can do, however, and what we have consistently done for the nearly 40-year history of the firm, is to make sure that we are not over-extended on risk during the late stages of a cycle, have ample liquidity on hand as valuations become stretched, and be prepared to react opportunistically when the next inflection point eventually arrives.