Q: What is the history and mission of the fund?
The Voya Strategic Income Opportunities Fund launched in November 2012, has had the same management team since inception nearly five year ago.
This is an unconstrained bond fund that seeks to achieve a return of LIBOR plus 3% to 4% through an economic cycle, but within a robustly defined risk parameter. “Unconstrained bond fund” does not mean unconstrained risk—it is unconstrained in terms of finding the right fixed-income instruments to generate our targeted return.
Q: What core beliefs drive your investment philosophy?
We define risk tolerance first and the return objective derives from that. There is a broad array of mutual funds in the fixed-income unconstrained space, making it difficult for a consumer to identify the risk tolerance or likely return. With that in mind, we approach risk from a correlation standpoint, using different risks and sectors available to us, to provide a more finite window of 4% to 6% expected volatility with the return objective of LIBOR plus 3% to 4%.
Within a finite risk budget process, we pair risks in ways that target our return objective while minimizing unnecessary volatility. That’s pillar number one.
Second, we use interest rate duration risk not as a primary risk driver but as a volatility suppressant relative to other bond market risks, like credit, securitized, or volatility risk.
Our fundamental approach is to seek attractive opportunities in fixed-income market spreads. Many unconstrained bond funds will use duration positioning as a definitional lever, but we use it as a volatility suppressant.
Structurally, we think interest rate forecasting is the lowest Sharpe ratio component available in the market. Corporate and securitized bonds are much more attractive to us as sources of alpha relative to a definitional interest rate call.
Q: What is your investment process?
We achieve our return objective through a heavily team-based approach. As the chief investment officer, I lead Voya Investment Management’s 150-plus-member fixed-income team.
We have a three-step process. First, the leaders of all the individual components of the different segments of the bond markets, including our macro portfolio management teams, work together on a macro strategic view of the global economy and bond markets. It’s a constant and iterative process to discuss what opportunities exist in the global market.
Second, we use this to inform asset and risk allocations within the portfolio that exploit the best combination of opportunities available. With a risk/return objective, and targeting LIBOR plus 3% to 4%, the portfolio managers, led by me, look for asset combinations that can achieve that return with the lowest possible volatility while avoiding tail risks or negative scenarios. We determine the risk allocation, how much goes into each bond market sector, our duration yield curve stance, and any currency stance in the portfolio.
Third, the 150-person team, broken into different sectors in the bond market, receives those allocations and buys and sells individual securities, enabling us to extract alpha within each individual bond market component. So, about half the value proposition is security selection; the other half is risk/sector allocation.
The entire process is overseen by the portfolio management and risk functions. The risk function is a critical one to ensure we adhere to the mindset that unconstrained bond is not unconstrained risk; it falls within a finite risk budget. The risk process ensures we adhere to our volatility bands, as well as our downside protection, with scenario and tail risk analyses.
Q: Does your macro view have a global or a domestic (U.S.) perspective?
We consistently look at things like global growth, the composite global growth within the U.S., the developed, more broadly developed, non-U.S., and emerging markets, as well as global central banks like the Federal Reserve, European Central Bank, Bank of Japan, and Bank of China.
We also look for any signs of inflation, up or down, tied to growth and the central bank element. Typically, our macro view centers on global growth, global central bank inflation, and a corporate profitability element, given that corporate profits, domestically and internationally, are an important driver across all market cycles.
We also have an “other” category in our global macro view which we evaluate semi-annually, six or seven key topical macro themes that periodically change.
Q: Can you provide examples of your research process?
Our top-down macro approach, involving all our investment teams, forms the foundation upon which individual security research is conducted. If we were considering an energy company, for example, we would have a view of U.S. currency valuation, global energy production, and trade dynamics from energy producers within the emerging market, developed world, and the U.S. Members of our high-yield credit team would look within each sector of the energy market in high-yield, and at each company, to create bottom-up research.
We would then look at traditional corporate underwriting and balance sheet, company, profitability, and rich/cheap analyses. We have numerous quantitative models and tools that inform our macro and micro opinions, so we use quantitative credit scoring analysis to assess financial statistics within industries in relative companies to drive the inclusion of that energy company within our portfolio.
Now, when choosing which types of energy companies to include in the portfolio, we may have two different metrics: if prices are low, one could be a supply-side story, where supply is strong; the other could be where demand is low.
If we believe supply is and will remain strong within the oil space, a low price should not impact oilfield service or midstream pipeline companies considerably, whereas a demand shortfall would. If we feel a supply-side factor is keeping oil prices lower, we orient toward midstream energy companies involved in processing and delivering energy products, as opposed to those involved in new drilling activity in offshore deep water, for example, or in independent energy.
Another example is commercial real estate. Our securitized team will partner with our 50-person real estate team to understand each of the issues within our CMBS (commercial mortgage-backed security) holdings on a granular level, as that informs our view of how those collateralized pools will play out. It also allows us to research risks—like hurricanes and flooding—because we know the properties.
Our top-down-meets-bottom-up approach helps us make better research decisions at the individual security level.
Q: How is your research team organized?
The research teams are embedded in the individual sector teams, so credit analysts within the investment-grade credit team partner and align with the portfolio managers to make investment decisions.
We prefer this to a model where a research team puts out recommendations that may or may not be followed. We want our investors across all spaces directly tied to the outcomes of portfolios and compensated based on our portfolio’s success.
Q: What types of fixed-income assets are eligible?
In bonds, it ranges from cash to U.S. or foreign government securities, including emerging market, hard dollar, both sovereign and corporate, and local currency emerging market sovereign debt. Currency risk is much more volatile than the bond component, so we tend to approach it within a very finite risk budget to avoid excess volatility.
We have specialty teams within all investment-grade and high-yield corporate bonds and bank loan securities. Mortgage securities range from straight agency, CMOs (collateralized mortgage obligations) as well as inverse IO (interest only) and PO (principal only) agency mortgages, and across securitized, from CMBS’s to non-agency mortgages, to ABS’s (asset-backed securities), and CLOs (collateralized loan obligations).
There is an overemphasis on the U.S. bond markets relative to global, with the potential exception of emerging markets. As the U.S. bond markets are the deepest, most liquid, and where we have our biggest team presence, there is a mild bias toward U.S. bonds.
Bank loans are a standard component of the fund and have been since its inception, with no limit on the amount of bank loans that we can have or on the rating. We can go from BB all the way down to C—it’s a fully open mandate. We want the right risk-adjusted return to achieve that LIBOR plus 3% to 4% return, so we have full discretion to allocate risk within both areas across the rating spectrum.
Q: Do you have an internal rating system or do you rely on rating agencies?
We view rating agencies as regulatory only. They can drive market valuation so we don’t ignore them; however, we always do our own assessments. This is a key point often overlooked—the potential volatility around an assessment for one company might be equal to that of another company at any point in time, but the potential volatility of those two companies or instruments over time can differ substantially.
For example, two companies could be rated the same—let’s say BBB. If one is in a low-volatility industry with regulated cash flows while the other is a non-regulated business with global competition and higher volatility profitability, that same rating doesn’t portray that increased potential volatility. But that’s how the bond markets tend to price, taking into account potential volatility around current rating.
If one of those companies is a utility, providing base load power to consumers, and the other is a flash-memory provider in the technology space, the rating might be the same today but what you need to be compensated for over the next one, five, or ten years can differ substantially. Rating agencies are not meant to assess that.
Our job is to assess not only the rating and quality of an instrument today but also future volatility and pricing attractiveness.
Q: What is your portfolio construction process, and does diversification play a role?
The bond portfolio has both spread and duration risk, and so our focus is to pair portfolio risks to decrease volatility to the extent we can, while still achieving the return objective.
Once we set those allocations, we are very aware of maintaining a diversified risk profile, so securitized risks such as CMBS’s, non-agencies, agency mortgages, and such are paired with credit risk like high-yield corporate bonds, CLOs, or IG (investment-grade) corporate bonds.
We know how diversified we are within government, securitized, and corporate credit instruments at the primary level. Beneath that we want diversified portfolios of those instruments. This fund has roughly 1,000 holdings within it, and so, with these diversified pools, no one instrument will unduly impair performance. We have no position size limits beyond the SEC’s established 5%, but with 1,000 or so holdings, our largest positions still fall under 1%.
In fixed income, you are not paid to take overly concentrated credit risk. We create diversified sleeves of exposure within each sector, but not diversified to where it hinders return potential.
We look at any concentration in individual countries and sectors when aggregated across any bank loans, but typically we start from a diversified set in eight different sectors, where we are naturally diversified at the sub-industry and security levels.
As far as our risk and buy/sell disciplines, it ultimately comes down to setting risk allocation, buying into diversified sub-portfolios and having a risk framework such that if the portfolio starts to increase in risk or drift toward that overall risk limit, we take action to achieve our targeted return.
Q: How do you define and manage risk?
Risk is important to us and, in the sense of this portfolio, it means realized volatility VAR (value at risk), forward-looking VAR and its decomposition, or a tracking error to LIBOR. We use external and proprietary systems to look at current allocations and their historical volatility, forward-looking factor volatility, and what would happen to that asset allocation using historical scenarios.
We have three teams who separately analyze risk: the sector teams, the portfolio managers, and the independent risk team. At a granular level, it’s understanding the risk within each security’s sector. And it is the portfolio management team and I who set the risk allocation.
