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Unconstrained in Selection, Not in Risk
Voya Strategic Income Opportunities Fund
Interview with: Matt Toms

Author: Ticker Magazine
Last Update: Oct 26, 11:28 AM EDT
In the vast global bond markets, different segments have different risk-return profiles. Matthew Toms, portfolio manager of the Voya Strategic Income Opportunities Fund, and a team of researchers select securities that offer superior risk/reward ratios as they allocate capital to fixed-income segments based on rigorous macro economic analysis.

“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.”
Q: What is the history and mission of the fund?

A: 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?

A: 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?

A: 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?

A: 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?

A: 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.

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