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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.”
A: We have to understand the key components of risk affecting our strategy: credit risk, interest rate risk, the risk of pre-payments as it pertains to mortgage securities, and look at any currency risk. We know exactly what level of exposure we have at any point in time, and can compare that to expected returns, and adjust the portfolio accordingly.

It’s also important that we look at tail risk. Tail risk is a surprise event, something that undermines the market and creates unexpected volatility.

In fixed income, it’s crucial we understand how much tail risk we’re taking. People like yield and income, and they just assume that fixed income will be safer than other asset classes. That’s generally true, but we want to understand and estimate how much downside could occur at any point in time to make sure we’re willing to accept that level of tail risk.

Tail risk is so important we’ve developed our own framework to estimate it. We look at information including Conditional Variance At Risk or CVaR at a 95% confidence level, and the “One in 20 Outcome,” If something happens in the market and we get to an extreme type of repricing—like a 2008 type of event—how will that affect the downside of the portfolio?

If, as market prices change and the tail risks of the portfolio start to increase, that signals us we’re probably not being properly compensated, and we’re going to look to become more defensive in how we construct the portfolio.

That’s what happened in 2007, and that helped us survive through the first half of 2008, which was obviously a very difficult market environment.

We think we’ve developed a framework to seek to estimate the downside risk to the portfolio and manage that risk according to our risk tolerance.

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