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Fund Operations

Capital Preservation

Tough Sledding in Multisector Bond Investing? It Depends on the Team.

Thornburg Investment Management
19 Sep 2017
4 min read

Versatile, relative-value analysis of securities across sub-sectors and hybrid asset classes can help fixed income teams negotiate a challenging, expansive, potentially rewarding terrain.

The Iditarod is considered one of the world’s most grueling and dangerous races. Sled dogs travel 1,100 miles through increasingly treacherous arctic terrain. The dogs and mushers traditionally run the entire day and then rest at night, and the journey can last for more than a week. Athletes competed like this for decades, with small adjustments to training regimens, but nothing revolutionary. The status quo reigned supreme until Susan Butcher ripped up the orthodoxy.

People naturally tend to prefer what’s familiar across most aspects of life, including investing. In psychology this is commonly referred to as the status quo bias. It is an innate inclination, making it difficult for us humans to avoid. We take the current state of affairs as a reference point and any deviation is generally viewed as a loss. The bias tends to interact with other documented non-rational cognitive pitfalls such as loss aversion, endowment effect, and regret avoidance—all natural cognitive errors that can lead investors to suboptimal financial decisions. In the realm of dog sled racing, Butcher soundly avoided the status quo by taking a fresh, unconventional approach to become a legend in the annals of Iditarod history.

Instead of running in the traditional fashion, which was twelve hours on and twelve hours off, she worked and rested her dogs in alternating four-to six-hour chunks throughout both night and day. The racing orthodoxy at the time viewed the method as risky. It gave her less time to sleep: while her dogs slept, she prepared for the next leg. However, Butcher was sure her strategy would lead to an advantage versus the competition and trained accordingly. Additionally, as a veterinary technician, she was a leader in the humane treatment of her dogs—an ESG-environmental, social, governance-investing tenet—making year-round care and training the standard for her team rather than the exception as it was at the time.

Other racers said Butcher’s methods wouldn’t work. After all, theirs were proven over decades. According to her husband, “In those days, the Iditarod was considered a man’s cowboy-type sport-rough and tumble. You did it because you were tough. Other racers said Susan could never win—‘she babies her dogs’.” But she won, and repeatedly: a record four times in a row. In her honor Alaska proclaimed the first day of the Iditarod Susan Butcher Day. “She fundamentally changed how folks prepare and run the race now,” her husband points out. Butcher’s unique approach to structuring her training and team led to unprecedented success in her sport.

What can we as investors learn from the legendary sled racer? Well, we can take note of her willingness to take a different, innovative approach, structuring her strategy and her team’s training to better negotiate the challenging environment in which she competed. Perhaps fixed income investors, particularly those seeking exposures to a wide variety of discrete asset classes, could benefit from a more flexible approach to cross-asset investing.

Asset managers historically built fixed income investment teams based on broad asset classes represented in a benchmark. Generally, first came analysts focused on U.S. Treasuries and agencies, then perhaps additional support was added around agency mortgage-backed securities, followed by investment-grade credit, and finally high-yield corporates and other riskier “plus” sectors. In theory, this team structure enables the bottom-up selection of best-in-class securities within a narrow silo that are then pushed up to a portfolio manager for inclusion in top-down allocation decisions for a core benchmark-like portfolio. Part and parcel of this structure is the notion that a sector analyst focused solely on a single industry, say U.S. automobiles, is best equipped to pick the best opportunity within that industry. That could be Ford one month, and GM the next. Whatever the case, the auto analyst is the team expert on U.S. auto manufacturers. But what if neither is particularly compelling compared to other sectors or fixed income sub-asset class credits? Should a place in the portfolio necessarily be maintained for U.S. auto sector exposure?

Once investment strategies began crossing boundaries, mixing discrete segments of investment grade, high yield, emerging market debt, etc., and drilling down into even more granular industry segments within each, things became complicated. Traditional core bond team structures have largely remained dual top-down, bottom-up processes, limiting flexibility. If clients are seeking a different outcome from their active managers with a multi-sector approach, it may make more sense for the asset manager to be structured more flexibly…More attractive relative valuation is often missed if specialists don’t adequately assess both fundamentals and relative value of securities both inside and outside their specialties, constraining the manager’s choices.

A versatile investment team structured to conduct fundamental analysis of individual securities across sectors and a wide variety of sub-asset classes, evaluating them both in relation to those currently in the portfolio and sundry to others outside it, may be better positioned to provide an optimal investment mix capable of delivering across a range of macroeconomic environments. It’s not easy to deviate from traditional norms, but whether in dog sled racing or investing, progress oftentimes depends on it.

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