Red Cedar Investment Management’s John Cassady III On Multi-Sector Fixed Income Investing
John Cassady III, CFA, CEO and Co-Chief Investment Officer of Red Cedar Investment Management, joined Keith Black, Managing Director of RIA Channel, to discuss how managers navigate the risks and inefficient markets in multi-sector fixed income investing. Please click on the arrow below to view the video.
Historically, fixed income investing risks focused on interest rates, credit, and convexity. Inflation, which is driven by an expansion in the money supply, drives interest rates and duration risk. Today’s bond market is more complex, with investors needing to analyze the risks from monetary and fiscal policy, geopolitical developments, and globalization or deglobalization. Cassady worries about taking 7 to 9 years of duration risk when a government has 6% annual budget deficits and debt in the amount of 120% of GDP.
A multisector bond approach allows the investment manager to decide the exposure to take to each risk factor. The preferred, hybrid, and securitized markets may offer inefficiencies not available in the Treasury and investment-grade corporate markets. Mortgage-backed securities have call risks and negative convexity, as homeowners lengthen duration by hesitating to sell their homes with low-rate mortgages. Preferred and hybrid securities, which are all callable, have nearly $1 trillion in market capitalization. Investors need to understand the credit analysis, the structural nuances, and the issuer’s motivation to call the securities. Managers can generate alpha on both security selection and structural analysis. Managers also need to analyze the credit support of issues in the securitized markets.
Red Cedar seeks to build an income-producing portfolio in a high-quality way. That is, the yield is not generated mainly from extending duration or reducing the credit quality of the portfolio. The goal is to earn income that will not be eroded by the falling bond prices that result from increasing interest rates and credit spreads. The firm implements tail-risk hedges to limit the impact of these risks on the portfolio, seeking an asymmetric payoff from the hedges when market volatility rises. Part of the work of reducing portfolio risks is to understand correlation across the sectors and diversify across risk factors. Preferred securities have less interest rate risk than many sectors believe, which diversifies the risks of investing in longer-duration bonds.
Principal Risks of Investing North Square Strategic Income Fund: Risk is inherent in all investing including an investment in the Fund. An investment in the Fund involves risk, including the following principal risks, among others: Market Risk, Credit Risk, Fixed Income Securities Risk, Interest Rate Risk, Preferred Securities Risk, Mortgage Backed and Asset Backed Securities Risk, High Yield (“Junk”) Bond Risk, and Derivatives Risk. Summary descriptions of these and other principal risks of investing in the Fund are set forth in the Fund’s prospectus. Before you decide whether to invest in the Fund, carefully consider these risk factors associated with investing in the Fund, which may cause investors to lose money. There can be no assurance that the Fund will achieve its investment objective. An investment in the Fund is not a deposit of the bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Please see the Fund’s prospectus for additional risk disclosures.
Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by calling 855-551-5521. Please read the prospectus carefully before you invest.
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