Quantum Capital Fixed Income Plus
investment strategy
The strategy objectives
In the medium term the objective of the strategy is to get ahead of the dollar bond market in the intermediate term and at the same time have a comparable level of risk. The HYG * index fund is used as the representations of the bond market, because an investor's alternative option is to purchase the shares of this fund

Over the past 10 years, the total return of dollar bonds averaged at 6.4% per year - before taxes on dividends (5.4% including taxes 15%). At the same time, the risk of the portfolio was relatively high in late 2011 and early 2016, but subsequently declined. The portfolio risk averaged 7.6% over 10 years, which will be the goal of the strategy.

The Quantum Capital Fixed Income Plus Strategy backtest showed a return of 8.1%, while having a volatility slightly lower than the HYG fund.

High yield Bonds market portfolio
backtest
HYG
* other index
Investor memorandum
Base currency
USD
Recommended investment period
from 2 year
Minimum entry threshold
100 000
Estimated return
8.1%
Management fee
1%
Success fee
15%
Investor profile
Quantum Capital Fixed Income Plus Strategy is well suited for investors who:
  • Want a stable capital gain
  • Do not want to put up with low deposit rates at banks
  • Are ready for small fluctuations in the value of their portfolio
  • Understand the disadvantages of selling bonds in a hurry
Return on invested capital from year to year
Table of monthly changes in portfolio value
Strategy performance
January 2010 - December 2019
Accumulated total return for the period
118%
Average annual return
8.1%
Portfolio volatility
5.3%
Strategy's Sharpe Ratio
1.42
HYG Fund Sharpe Ratio
0.76
Share of months with positive returns
69%
Maximum portfolio drawdown
-7.1%
Considering the goal of the strategy is to overtake the bond market at a comparable level of risk, portfolio instruments should generally be similar in type. The HYG Index Fund consists entirely of high-yielding bonds - that is, bonds of companies with worsen financial health, which may have losses, declining revenues, a lot of debt and other problems. When lending to such companies, investors required to be compensated for the risks they take, and therefore the yield of such bonds is higher than that of higher-quality issuers.
  • The main instrument of the strategy is debt instruments. Debt instruments include: notes, bonds, deposits and money market instruments. HYG Index High Yield Bonds are part of this type of asset. In addition, “low-yield” bonds, the debt of high-quality companies, also fall here. Having the opportunity to move away from high-yielding bonds, we can reduce the credit risks of the portfolio, but increase others - for example, buy shares, hybrid instruments or bonds with high duration.
  • The secondary instruments are hybrid instruments. These include perpetual bonds, preferred shares and convertible debt instruments. These securities are interesting in that they are similar to both, bonds and stocks and therefore offer higher returns than the first ones.
  • Additional strategy instruments are stocks and currencies. These types of asset is available for purchase when we are confident in investment ideas and cannot allow the investor to miss the opportunity.
  • Derivatives may be used to hedge risks.
  • All of the above tools can be purchased both directly and through ETF, ETN, ETC and structured products.
Portfolio Target Structure
Significant deviations from the target structure are allowed and expected.
Debt instruments
Bonds
High yield bonds
Hybrid instruments
Equity instruments
Stocks
60%
Debt instruments
20%
Hybrid instruments
20%
Other instruments
Investment approach
We use the following approach, when choosing bonds:
  • The choice of bond currency. Considering the goal of the strategy is the yield in US dollars, in most cases the US dollar is chosen. At the same time, we can choose other currencies if we do not expect currency risks.
  • Focus on actively traded instruments. Bonds with a large amount outstanding and recently issued securities are traded much more actively than old instruments that settle in the portfolios of pension funds are held to maturity.
  • Choosing a credit rating. Credit ratings roughly indicate the financial condition of the company. The lower the rating (the less stable the company), the bond yields are usually higher.
  • Focus on suitable sectors and countries in which portfolio managers have expertise. We exclude certain sectors, such as pharmaceuticals and biotechnologies, due to their specifics. Also, not wanting to expose investors to the risk of weakening tenge, we do not invest in the oil and gas sector and oil exporting countries.
After selecting bonds using the filters above,
we see the overall picture:
Bonds above the central line represent a more interesting yield / duration ratio. However, the market does not just require higher returns from these instruments - probably they might have financial difficulties. As portfolio managers, our task is to analyse their industries, macro factors, securities specifics and come to a conclusion, whether the yield is justified and if we should buy these bonds.
Yields
Duration (years)
Management of risks
  • The strategy risk objective is volatility, that is comparable with the IBOXHY index, i.e., the standard deviation of return on average should not exceed 7.6%.
  • The main risks for the strategy are credit, interest and concentration risks. We also take into account currency and liquidity risks.
  • Credit risk - the likelihood that the company will not be able to pay its bonds. This happens if the company does not earn enough money and a default occurs. In order to prevent defaults in the portfolios of investors, portfolio managers carefully analyse the companies, scope of their activities, make cash flow forecasts.
  • Interest rate risk - the degree of influence of changes in interest rates on instrument prices. When interest rates rise, the prices of bonds drop, as investors have the opportunity to invest in higher rates. And the longer is the bond, the larger is the drop in its price. To manage this risk, QC predicts interest rates and the likelihood of changes. Whether to buy longer-term bonds is decided according to this.
  • Concentration risk - portfolio's vulnerability to the results of one company. If an investor’s portfolio has only one instrument, then it completely depends on the performance of this security. Many instruments balance each other's movements and reduce the concentration risk.
  • Currency risk - the likelihood that changes in exchange rates will lead to losses. However, it arises only when investing in non-dollar instruments. QC intends to acquire such securities only after a thorough macroeconomic analysis to minimize currency risk.
  • Liquidity risk - the degree of difficulty in selling instruments. The higher is this risk, the more difficult it is to sell securities in a short period of time and without a significant price reduction. This risk is controlled by choosing more traded instruments, with large amount outstanding.
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