How we invest

‘Learning is experience. Everything else is just information.’

– Albert Einstein

In an increasingly digitised and connected world, economic and financial market information is abundant. Faster, inclusive access, requiring little more than curiosity, tenacity, and a web browser renders the notion of an ‘information advantage’ increasingly hard to substantiate. Now more than ever before, the advantage comes in how you separate the meaningful from the meaningless; how you organise and prioritise the dataflow. Our skill comes in evaluating the myriad sources of information to better understand the world, so that we may pinpoint the best opportunities in fixed income, and avoid the more serious risks.

Our portfolio management team averages 14 years industry experience, our principals having worked together for many years prior to Kapstream’s establishment in 2006.

Experience has shaped the way we invest, a culmination of these decades of hands on investment experience, brought together in a singularly focused process aimed at delivering portfolio solutions that help meet the needs of so many investors today – consistent, absolute returns with underlying capital preservation.

Our Process

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Research and analysis

Our allocation begins with an analysis of key global economic trends. We develop our view during quarterly economic roundtable sessions with leading members of the fixed income community.

Next, we consider country specific factors and market expectations, before moving on to identify specific opportunities.

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Capital preservation

At our heart is an unwavering focus on protecting the value of our clients’ investments, making active use of a wide range of techniques to do so when risk of loss threatens.

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Dynamic beta, portable alpha

We divide each portfolio into beta and alpha components, then use innovative strategies to actively manage both.

We dynamically allocate the beta component across global fixed interest markets, constantly evaluating and adjusting our allocation in response to the changing environment. Then we overlay alpha strategies to enhance returns, often using futures, options, swaps and credit default swaps.

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Risk management

Constant monitoring and active mitigation of the primary risks present in client portfolios – the sensitivity to a change in headline interest rates, the threat of default, and market liquidity – is integral to ensuring we maintain a prudent balance between overall portfolio risk and return.

How do we think about the portfolio?

 

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Capital preservation remains a constant in our thinking, pervasive in all decision-making. For every dollar that our clients entrust to us to manage a pivotal decision we constantly re-evaluate is how much of that dollar we are comfortable to invest at any given point, and at what risk.

Once we are comfortable with that high-level determination the unconstrained nature of our strategy allows us to seek out the best investments wherever in the world they are.

Investing even in a diverse portfolio of predominantly investment-grade bonds – the ‘beta’ element – is not without risk, the most significant of these being their sensitivity to a change in interest rates (duration), and the chance of failure to pay investors their due interest (credit default).

We constantly monitor and adjust the portfolio’s exposure to these and other risks, typically using derivatives to do so given their greater liquidity, and the ability to ‘fine-tune’ more closely than is possible by buying and selling the bonds in the portfolio.

We also use derivative instruments to add a small amount of additional return through a series of ‘relative value’ alpha trades, when we have specific conviction.


  • Global Economic
    Research & Analysis
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    Macro 'top down' framework development reflects understanding of monetary & fiscal policy, inflation, and other economic indicators
  • Country Specific
    Assessment
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    Regional forecasts across major trade blocks incorporated for GDP, CPI, currency, equity markets, etc.
  • Market
    Expectations
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    Interest rates, bond yield curves and valuations examined in detail

  • Identify
    Opportunities
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    Individual securities and positions analysed for relative value, spread, volatility, currency, duration, curve, country, sector
  • Risk
    Levels
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    Correlation, conviction, and return expectation assessed to determine trade size and entry/exit levels
Kapstream Portfolio