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Relative Value Across the Global Fixed-Income Spectrum
Neuberger Berman Strategic Income Fund
Interview with: Thomas Marthaler

Author: Ticker Magazine
Last Update: Aug 26, 7:08 AM ET
Neuberger Berman Strategic Income Fund employs a relative-value strategy to find opportunities from high yield bonds to Treasuries across the globe. The fund uses dedicated sector specialist teams that formulate investment views to develop forward-looking ideas about the distribution of risk and return.

“Our goal is to achieve the highest risk-adjusted return possible at any point in time, given our views on the market and how much risk we think is appropriate to take.”
Q: What is the background of the fund and its assets under management?

A: We are a multi-sector, fixed income mutual fund with a 12-year history. The mutual fund has approximately $2.2 billion in assets under management as of 6/30/2015, large enough to execute our strategy efficiently and work with the counterparties on the street we need to work with, but still small enough to navigate in and out of markets whenever we feel that’s appropriate.

At Neuberger Berman, we have sector specialist teams who support the management of the portfolio. For example, we have dedicated professionals: some do high yield, others emerging markets, and some look just at Treasuries. They’re subject matter experts who live and breathe their world all day long.

All the teams at Neuberger Berman use a tool we’ve developed to formulate sector specific investment views. We ask every team of specialists to describe risk and return for their part of the market. The high yield team, the bank loan team, the emerging markets team, etc. —they all give us forward-looking ideas about a distribution of risk and return.

This unique framework leads us to uncover opportunities and establishes a confidence level in all of our views, which in turn allows us to scale how much risk we want to take.

Q: How would you define your investment philosophy?

A: We have a relative-value strategy and look to identify market mispricings. These occur throughout time, creating opportunities for us to implement our strategy and seek to meet our clients’ return objectives. Our approach to relative value is about determining how much risk to take and then seeking returns comparable to the risk.

We are agnostic about where we go to get value. If we think making an interest rate decision is attractive, we might do that. In other market instances we might prefer to take credit risk. We go where we believe the opportunities are.

Q: How does your investment process reflect this philosophy?

A: We look at a given point in time to identify the most efficient way to invest in fixed income, using the entire global spectrum of fixed income instruments as our opportunity set.

This allows us to go anywhere across fixed income to identify and exploit active investment opportunities to the best of our ability. Our goal is to achieve the highest risk-adjusted return possible at any point in time, given our views on the market and how much risk we think is appropriate to take.

When the financial markets melted down in 2008, our fund actually delivered positive returns. The 12-month return of the institutional share class (NSTLX) for the period ended 12/31/2008 was 4.03%.

We achieved those results, in part, because of how we implement our strategy. By actively adjusting the amount of risk we take in the portfolio based on market opportunities, we can seek consistent long-term results. Our very active approach sets us apart from our competitors.

Q: Which kinds of securities do you look for as a fixed-income fund with a relative-value strategy?

A: Today, we are very constructive on what we call the spread sectors. These include the fixed income sectors—such as non-investment grade, non-agency mortgages, emerging markets debt and CMBS. In our view, these sectors compensate us for the risk we’re willing to take.

We’re less excited about interest-rate risk. We have reduced the portfolio’s sensitivity to changes in interest rates by selling futures contracts in the U.S. Treasury market. Relative to the benchmark, we’re underweight Treasuries, and actually have negative contribution of duration from Treasuries in the portfolio. Core Europe (Germany and France) is another place we have negative contribution of duration. We’re also underweight rates in Japan.

We argue the U.S., Core Europe and Japan are likely to see gradually higher interest rates because we anticipate strong economic growth across these three regions. As a result we want to be defensively positioned for those outcomes.

Q: You are a global fund. What regions do you invest in?

A: We have flexibility to invest anywhere; while our portfolio is primarily U.S.-centric, we supplement that with opportunities we see in other markets.

For example, we have a long exposure in New Zealand. We anticipate rates to move gradually lower as its economy is slowing down. So that’s a position we think makes sense to be overweight.

We also have a small overweight in Italy. As the European Central Bank implements quantitative easing, we ultimately anticipate they will achieve a convergence of interest rates between countries, bringing the spread differential between the core European countries like France and Germany much closer to Italy. We think Italy’s a good place to be long, as rates fall slightly relative to Core Europe.

Q: Fixed-income fund managers need a healthy skepticism regarding the Fed’s transparency. How do you achieve that?

A: We do our own independent assessment of economic data and determine how interest rates may be affected. It’s one of the hardest tasks we face as managers of a fixed income portfolio.

We watch the market for technical indicators that can significantly influence short-term interest rate volatility and undermine economic fundamental views. Obviously it’s difficult to predict what economic trends will surface over any given time.

Central bank policy is also critically important. We try to anticipate where the Fed is headed and the impact its policy will have on the market. We believe that monetary stimulus matters and will ultimately result in stronger economic conditions—it’s just taking longer for that transition to occur than we would have envisioned.

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