Brown Brothers Harriman’s (BBH) Taxable Fixed Income Strategies combine our unique valuation framework and comprehensive credit review criteria to build portfolios of durable credits purchased when they are at attractive yields. Credit valuations are often disconnected from their underlying fundamentals and are prone to unjustifiably high levels of volatility, an inefficiency that provides the opportunity to enhance fixed income returns through active management. Our disciplined, value-based investment process seeks to:
- Preserve capital through independent research
- Invest in credit only when a margin of safety* exists
- Drive portfolio construction with value opportunities
- Take a long-term approach
- Foster a culture of transparency, process discipline, and open debate
We build our taxable fixed income portfolios bond-by-bond, filtering the market for potentially compelling values using fundamental analysis and a unique valuation framework. We then purchase credits with a margin of safety* that varies by the type and rating of the bond and defines a price cushion that we believe will be likely to define an attractive price for the bond over the longer term, allowing for the cyclicality of credit markets. We repeat our investment process to build portfolios of durable credits trading at attractive yields.
We aim to purchase durable credits that meet the following investment criteria:
- Durability: We require that the issuers in our portfolios possess a durable revenue model and/or collateral. We also assess the business’ ability to withstand a wide variety of regulatory scenarios and economic shocks.
- Transparency: The issuer must operate a business model and financial structure that we can identify and understand. The more complex the business model or esoteric the capital structure, the less likely we will invest in the issuer.
- Management: Strong management is critical to identifying a durable credit, and we identify management teams that maintain a balanced approach toward all capital providers.
- Structure: The issuer’s ability to generate adequate internal funding to support its capital structure is critical. We validate that the issuer does not bear excessive debt given the underlying volatility of cash flows, nor maintain an unhealthy reliance on the capital markets for funding.
*We believe a margin of safety exists when we are able to mitigate both business risk (our business, financial, and management criteria have been met; sustainable competitive advantages exist) AND price risk (when we believe there is a significant discount to intrinsic value at the time of purchase — we aim to purchase at 75% of our estimate to intrinsic value or less).
-Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk; investments may be worth more or less than the original cost when redeemed.