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June 30, 2014 at 01:02 PM
This is the first in a series of extended profiles of the 2014 Separately Managed Account Managers of the Year. Briefer profiles and an overview of the 10th annual SMA Managers of the Year can be found in Investment Advisor’s July 2014 cover story. Additional reporting and video interviews of the winning managers can be found on our 2014 SMA Managers of the Year home page.
When discussing who should win SMA Manager of the Year in fixed income, the awards committee was first impressed with Tom Johnson Investment Management’s intermediate fixed-income strategy’s positive return in 2013, a dismal year for fixed income. Looking beyond that headline, PMC’s analysts highlighted the strategy’s high performance over the last three- and five-year periods on both an absolute and risk-adjusted basis. The Oklahoma City-based firm is also highly committed to the space—nearly a third of the company’s total assets are invested in this strategy—has exhibited exceptional client service and has held together its investment team for a long time.
The committee also thought Tom Johnson worthy of praise for its “exceptional client service” and for the employee-owned firm’s culture.
“We’ve stuck to a real niche in the intermediate fixed income world,” said Douglas Haws, TJIM’s vice president and portfolio manager on the strategy. The portfolio holds A-rated or better bonds, “but with a duration that’s set to 75%-125% of our benchmark [the Barclays Intermediate Government/Credit Index].” That allows TJIM clients to “know what they’re getting,” said Haws. “We’re not taking big duration bets, but we have an opportunity to scale along that ratio.” Haws said the flexible yet conservative approach allows the strategy to “provide excellent returns, even leaving out the BBB and below; it gives us that opportunity to outperform over the long run. That’s one of the key aspects of intermediate fixed income—it doesn’t often lose money.”
President and CIO Richard Parry said in an email interview that the portfolio has “broad yet conservative guidelines” for the strategy. Those guidelines, he said, “allowed us to take advantage of the extreme widening and subsequent tightening in credit spreads for financial issuers and other corporate bonds since 2008 and our duration guidelines during this period of time offered the consistency.”
When asked what sets TJIM apart, Parry listed four areas. First, he highlighted the “diversified base of investment professionals” at the firm, and wanted to ensure the entire team was named: “Doug Haws, Cory Robinson, Steve Schenk, Ned Schrems are all CFA charterholders. Our trader, Nick Pointer, is a CFA Level III candidate.”
Second, that team works on both fixed income and equity portfolios. “The insights we gain from economic, earnings, and credit work provide illuminations for each of our portfolios,” Parry said. As an example, he said “sometimes our earnings work yields fixed income security selections and sometimes credit work yields equity insights.”
Third is the “four lever” fixed income process at the firm: a duration lever, a sector lever, a structure lever and a quality lever. “We adjust these levers based on the relative attractiveness of different risk factors in the bond market,” specifically:
- Duration: from 75% to 125% of index duration based on interest rate outlook
- Sector: from 100% Treasuries to 100% corporates based on spread levels
- Structure: from overweights to underweights at attractive or unattractive points on the yield curve
- Quality: from a 100% position in A-rated corporate bonds to a 100% position in AAA-rated bond “driven primarily by individual security selection”
The position of each of the levers, Parry said, “determines the resultant portfolio duration, structure and yield, and how the portfolio will perform under different environments.
