Thoughts from Reams on the Road Ahead – Rising Rates and other risks in bonds

The current rate environment poses significant risks for investors who are taking a traditional approach to fixed income investing.

Redwood filed a preliminary simplified prospectus on March 18th for the proposed offering of the Redwood Flexible Bond Class, to be managed by Scout Investment’s Reams Asset Management Division.

Reams has been managing fixed income in a very unique way, dating back to 1981.  Instead of using a spread/yield based approach, Reams takes a total return/relative value approach to fixed income investing, that has yielded stand out results.

Here are some excerpts from a call with Reams that we undertook as part of our due diligence process.

Question 1:

Reams is different than most managers as you ‘embrace volatility,’ can you explain to us what embracing volatility means from an investment perspective?
Listen to this audio here.

Quotes:

“…that’s how we’re different, we don’t build portfolios for income, we build portfolios respecting volatility, and reacting to volatility-  hoping to add alpha to the portfolio in that way”

“…react opportunistically to valuations discrepancies in the market.  We spend a lot of time in the foxhole waiting for opportunities to happen.”

Question 2:

Why the Reams approach?  Why now?
Listen to this audio here.

Quotes:

“Never before has our philosophy been more pertinent to markets”

“Wall street is significantly damaged since the fall of Lehman, it is broken and not coming back soon…”

Question 3:

When does the Reams approach not work well?
Listen to the audio here.

Quotes:

“… what’s the one thing that keeps (us) up at night?  Many people expect me to say, ‘rising rates’ – no, that’s a good thing”

Question 4:

What does the mid-term rate outlook mean for client portfolios?
Listen to the audio here.

Quotes:

“…base case is volatility, and (rates) moving up gradually”

And some other thoughts from Reams:

Reams does not see value in Wall Street’s structured products (1:14)

High yield is a tactical instrument, not a strategic instrument (3:32)

Our conversation with Todd Thompson was another part of our due diligence process that has re-enforced our view that Reams is a standout manager in the fixed income space, and that their investment philosophy, strategy and approach are what investors should be looking for in the current environment.

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