Silverdale Bond Fund

Overview

Description

Silverdale Bond Fund is a diversified portfolio of primarily investment grade short duration US dollar bonds, actively managed for enhance returns.

Investment Objective

To generate enhanced investor returns by clever use of asset-level leverage, while actively managing the portfolio duration.

Key Advantage

  • Quality assets: Investment grade bonds (minimum 75%)
  • Short duration (circa 2 years) with no material impact of interest rate change
  • Low volatility
  • Excellent returns of 8% – 10% p.a.
  • No forex risk (US dollars only)
  • Enhanced returns, prudent use of non-recourse leverage
  • Quarterly dividend distribution, predetermined cash inflow for investors
  • Well diversified portfolio of over 100 bonds
  • Liquid open-ended fund with weekly subscription/redemption
  • State-of-the-art, risk management systems, using proprietary cash flow modelling.
  • As interest rates go up, performance is likely to improve due to short reinvestment period.
  • Strong track record of over 7 years.

Asset Class

Emerging Market vs Developed Market

Government debt as percentage of GDP has been sliding down for Emerging Markets (EM) while it has been rising for Developed Markets (DM).

EMs hold almost twice the amount of forex reserves as compared to DM.

EMs corporate have less debt as compared to DM corporate

Yet: EM bonds offer higher yield pickup of ~80 bps over DM bonds for same credit rating!

Investment Grade vs High Yield

Investment Grade (IG) bonds provide superior risk-adjusted returns than High Yield (HY) bonds.

According to Standard & Poor’s, the default rate of 3 years investment grade credit 0.25% as compared to non-investment grade default rate of 10.63%.

(Source: S&P Global)

Leveraged IG gives returns similar to that of HY without adding credit risk.

Short Duration Funds

The increase in interest rates is good news for fixed income investors. Simple: higher the interest rates, higher the bond returns.

True, there would be short term adjustment pain, but that can be taken care of by portfolio laddering with short weighted average duration. In an increasing interest rate environment, the coupons and sale proceeds get re-invested at increasingly higher yields!

The decrease in interest rates is good news for fixed income investors as it implies capital gains for fixed income investors. While lower interest imply lower bond yields it can be mitigated by increasing portfolio duration and/or use leverage.

 

Our Edge

Fungible Cash Flow Modeling

The key risk of investing in fixed income securities is the redemption risk

Silverdale’s core competency is its proprietary Cash Flow Modelling based on fungible cash (SCFM), which provides us insight into the bond issuer’s Ability to Pay and Willingness to Pay. SCFM is the core of our investment process:

  • Quant Filters: Proprietary algos to scan and sieve the investment universe

    – EM $2 trillion; 150k+ bonds with duration 0.5 to 6 yrs; 5 000 tracked; 500 actively followed

  • Proprietary cash flow modelling

    – Based on fungible cash and legal review of the terms of issuance, structure and waterfall

  • Team Review

    – Consensus based approach with CIO negative veto

  • Risk-based Allocation

    – Portfolio sizing based on implied risk (Duration Times Spread)
    – Internal and external of investment restrictions with strict stop-loss and pro-active re-sizing of investment positions

  • Trade Execution

    – Best execution no conflict of interest (no soft dollars)

  • Learnings

    – Constant feedback loop from micro/macro news, trading desk, and strategic positioning

Beyond credit filters such as credit rating of bonds, duration, YTM, etc., we deploy SCFM based on Legal Review of bond covenants, and proprietary Silverdale Risk Management Protocol (SRMP) to select bonds with superior risk-adjusted returns.

Duration Management, Diversification & Optimization Built on robust Risk Management System

Portfolio Attribution

Rating Profile

Maturity Profile

Geographical Profile

Sectoral Profile

Communiques

Read our latest Silverdale Fund of Bond Fund communique.
To view the previous communiques, please click here.