Absolute value includes a broad array of assets with particular emphasis on structured finance securities. In absolute value investing, we seek to acquire assets at a substantial discount to intrinsic value which have structural advantages that the market does not appreciate or issues which are difficult for most fixed income managers to analyze. These are typically seasoned deals involving collateral pools which can be deconstructed in detail at the loan level.

 

LIBOR Plus Strategies: The typical benchmarks are 1- or 3-Month LIBOR. The universe of assets is primarily senior class ABS and CMBS, corporate issues and CMO’s. The strategy seeks to add value through security selection and sector rotation. Yield curve positioning relative to benchmark can be a secondary source of return. Portfolio duration typically is limited to 1-12 months.

Active Core Strategies: The composition of the portfolio reflects the assets in the benchmark: corporate bonds, MBS, ABS, CMBS, Agency issues, U.S. Treasuries and REMICs. From this universe, we construct granular portfolios that are highly diversified by issue, obligor, sector and sub-sector. Portfolio duration and partial duration exposures generally are close to the benchmark. In Active Core, security selection is the driver of performance, thus our investment process is focused on bottom-up analysis of assets in the corporate, structured credit and MBS sectors. The decision to buy or sell an issue reflects an integration of fundamental research, technical inputs and quantitative analysis.

Absolute Return Strategies: These portfolios are the platform for our best ideas given the flexibility in investment guidelines and the ability to buy protection or hedge market-related volatility. Absolute return strategies invest in a wide universe of securities, both long and short. In some mandates, leverage may be employed. Within the allocations to structured credit, we tend to invest at the less levered, senior portions of the capital structure, which provides a margin for error if there is slippage in our models or forecasts. We favor securities that are complex or idiosyncratic, areas where in-depth analysis and focused, proprietary research and modeling give us conviction and competitive advantage.

Declaration’s corporate credit research process is conducted by a team of industry-specific corporate credit analysts. The analysts are assigned a core group of industry sectors and their primary research responsibilities are to the universe of triple-A through double-B rated cash & credit derivative obligors. Analysts also have research responsibilities of select single-B, triple-C and distressed corporate opportunities.

 

The corporate credit research process is a “bottom-up” oriented process with credit research driving relative value determination.

Fundamental Credit Analysis

Qualitative Credit Analysis:

 

In non-Agency RMBS, CMBS and Consumer ABS, the research process covers issuer, servicer, collateral and issue structure. We form an opinion regarding the issuer and servicer based on several criteria: an evaluation of their unsecured credit by our corporate credit analysts; an assessment of the issuer’s personnel, experience and underwriting practices; loss mitigation practices; systems development and utilization; and regulatory compliance.

The analysis of collateral at the loan level is focused on key factors which affect default and severity outcomes: effective Loan-to-Value, the quality of underwriting in the pool, geographic concentration, loan age, property type, borrower quality, rate reset shocks, and other variables. Stress runs are based on home price change scenarios, the underwriting policies of the issuer, and deal vintage.

The analysis of issue structure seeks to quantify the tenor of the security and identify how loan-level losses may affect cash flows on the notes we may purchase. We review the transaction’s structural characteristics including credit enhancement, loss or delinquency triggers, cash flow waterfall, and allocation of losses.

In each strategy, we seek to control portfolio volatility in “normal” and “shock” regimes. In long-only core products, we measure portfolio volatility against the benchmark given client risk budget preferences. In LIBOR based and alternative products, we focus on portfolio tracking error versus risk budget, as well as the probabilities of generating sub-Libor or sub-zero returns in a given month, quarter or year. As a bottom up manager, our risk management process centers on the probable effects of security-specific exposures (long or short positions).

For risk and portfolio management, we use various databases and a proprietary management infrastructure (“Unity”) as our platform. External sources for data, research and third party risk systems include Bloomberg, Yield Book, Capital IQ, Loan Performance, ABSNet, Intex, Trepp, Real Point and others. We use these systems to obtain risk measures, run cash flows, analyze deal structure, model default frequencies, aid in compliance testing and in surveillance monitoring.