2013 was a dismal year for fixed income, but Doug Haws and his team at TJIM, this year's overall SMA Manager award winner, made it work.. (Photo: Tom McKenzie)

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.

The fourth differentiator, Parry said is that the entire Tom Johnson Investment Management staff is “motivated by interesting work” and has “the autonomy to find unique solutions, a flat organizational chart, a solid base salary and participation in the profits of the organization based on contributions to our success in client retention, marketing and investment performance. “

So what will the future bring? If it was difficult to provide positive returns from a fixed income portfolio in 2013, will 2014 and beyond be more amenable to bond investing?

Parry said TJIM is focusing on employment; inflation and deflation; and tapering or stimulus by central banks in the United States, Japan and Europe and their impact on interest rates. He said, deadpan even in an email, that “it is a difficult time to be a conservative bond manager,” citing low absolute yield levels, “fairly tight” credit spreads and the fact that high quality corporate bonds “are trading as a fairly homogeneous group.” TJIM is taking a conservative approach, he said, since “opportunities are fairly limited.” The firm is maintaining a lower duration, moving more toward Treasuries for liquidity and has “begun buying floating rate bonds.”

Parry has broader concerns than just TJIM’s intermediate fixed income SMA, especially about overall bond market liquidity. He noted that “bid/offer spreads that our traders are seeing are tight, giving the illusion of liquidity. However, market depth and dealer inventory is fairly limited. With the Fed’s suppression of rates, many investors are being forced out of their “habitat” to longer duration or lower quality or other risk factors in search of yield, which has been made easier by the advent of ETFs. “These factors create a situation that will inevitably end badly for many investors.”

One other item of interest to advisors: Parry said that TJIM “isn’t a household name and doesn’t have an army of wholesalers.” Still, so many advisors who use TJIM for the first time “are surprised to be able to call us and to speak directly with one of our investment decision makers. “ By dint of its culture, its outperformance and its overall SMA Manager of the Year award, you may be hearing more about Tom Johnson Investment Management.

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.