Principles of Fixed Income Investing
The essence of our fixed income process can be summarized in one sentence: We purchase durable credits when they are available at attractive yields. At BBH, our fixed income investment philosophy draws upon our investment culture as a firm and is grounded in a few key insights. First, credit valuations across fixed income sectors historically offer compensation well in excess of default-driven losses. Second, credit spreads are more volatile than the underlying fundamentals justify providing a fertile environment for active management. Third, we believe a patient, long term approach is necessary to deliver peer leading total returns.
Our investment team seeks to deliver attractive long-term results by rigorously applying the following investment principles.
We are value investors: We believe that credit valuations are often disconnected from their underlying fundamentals. We take advantage of this basic and lasting inefficiency by purchasing individual securities that satisfy both our credit and valuation criteria.
We invest with a margin of safety: With respect to fixed income investments, a margin of safety exists when the additional yield offers, in BBH’s view, compensation for the potential credit, liquidity and inherent price volatility of that type of security and it is therefore more likely to outperform an equivalent maturity Treasury instrument over a 3-5 year horizon.: We require a margin of safety when purchasing credits. A margin of safety provides an additional discount to allow for the cyclicality of credit markets.
We aim to preserve capital through thorough underwriting: We are committed to fundamental research and have made it the foundation of our investment process. We commit capital only to durable, transparent, well managed, and appropriately structured investments.
We take a long-term approach: Our valuation assessment of a bond may not coincide with market views prior to maturity. Therefore, we invest with a long-term approach, employing discipline and patience.
We let value opportunities drive portfolio construction: Our security selection and sector weightings are built “bottom-up” from the depth and availability of attractively priced opportunities, not “top-down” from benchmarks, ratings, or macro-thematic views. When attractive valuations are not available we maintain cash, Treasuries, or other liquid reserves.
We foster a culture of transparency, process discipline, and open debate: We believe these principles, supported by a peer review process, checklists, and clear evaluation criteria, lead to greater objectivity and better decisions.