US Investment Grade Corporate Strategy

Overview
Investment Approach
Portfolio Manager

Overview

Strategy Facts

Capability:	Fixed Income
Strategy Inception:	March 2000
Benchmark:	Bloomberg U.S. Corporate Index

Strategy Facts

Capability:	Fixed Income
Strategy Inception:	March 2000
Benchmark:	Bloomberg U.S. Corporate Index

Summary

The Investment Grade Corporate Strategy is a value-oriented fixed income strategy that seeks attractive total returns from income and price appreciation by investing in a diversified portfolio of debt issued by corporations and other non-government issuers. To help achieve this objective, the strategy combines a top-down macroeconomic assessment, to determine optimal beta positioning for the portfolio, with rigorous bottom-up fundamental analysis.

Investment Approach

Philosophy

The team believes that market participants may often under or overvalue a company’s default risk, resulting in bond prices that fail to reflect the true credit profile of a company. However, the team believes that the market, over time, will re-value the bond prices of high-quality issuers based on an improving credit profile, thereby offering investors in undervalued, high-quality issuers, the opportunity to potentially exploit these pricing inefficiencies and earn superior returns over the long term.

The team believes that successful credit management depends on four factors:

A value-driven process
Forward-looking credit analysis
Broad diversification in an attempt to reduce portfolio risk
A global approach

Differentiators

Customization

The team delivers fixed income expertise in a customized, solutions-based approach that optimizes the application of the team's global resources to the investment objectives of the individual client. The team is client-centric in all aspects of the relationship.

Right-Sized

As a mid-sized asset manager, the team has the depth and breadth of resources to provide our clients with options ranging from highly customized strategies to standardized fund options. The team benefits from a collaborative structure based on small team of sector specialists enabling the team to confidently implement investment themes across portfolios.

Extensive Resources of a Global Firm

MSIM has a cohesive team of fixed income specialists in New York, London, Singapore and Tokyo who can identify opportunities to capture returns in all major markets worldwide. They bring together an impressive range of market experience, intellectual rigour and academic achievements.

Intensive Risk Management

At the strategy level, the team integrates daily monitoring that helps ensure compliance with guidelines and quantifies portfolio risk exposures. At the firm level, the risk management team operates independently of the business functions.

Investment Process

1	Macro analysis:
	To determine the optimal beta positioning of the portfolio, the process begins with a top-down value assessment of the corporate bond universe, including a consideration of macroeconomic conditions, the corporate earnings environment and relative valuations. The team examines swap spreads as a proxy for the liquidity premium embedded within corporate spreads, and assesses factors such as leverage and asset volatility (which drive both equity volatility and default spreads) as an indicator of future default expectations.
2	Screening:
	The team uses quantitative tools and signals to complement their fundamental research and enhance their process. An example of this is the use of Moody’s Credit Edge, an industry leading Merton-based structural model. The output offers the ability to to screen and compare credits, model events and monitor portfolio risk.
3	Credit analysis:
	The team focuses on financial risk, business risk and management ability/intentions. When analyzing business risk, the team assesses a company’s competitive position, its diversification and growth potential, the value of its franchise, and the flexibility of its business model in terms of the variability of its cost structure. Financial risk involves an examination of a company’s financial statements to assess the suitability of the company’s capital structure for the risk entailed in its business. The group also seeks to understand management’s intentions, in terms of business development and capital structure, and ability to execute.
4	Valuation analysis:
	The team’s credit analysis narrows the universe to approximately 200 to 300 investment candidates on which a relative valuation assessment is conducted. The team derives a "fair value" spread for each bond that is compared to the market spread to determine a bond’s under- or over-valuation.
5	Portfolio construction:
	A portfolio of 100 to 150 issuers is constructed, with sector allocation driven primarily from bottom-up security selection (subject to risk management guidelines). Integral to the team’s portfolio construction process is the measurement and monitoring of market risk, duration and volatility, and credit risk through the use of proprietary risk measures (i.e., Distance to Default) and proprietary models. The team actively manages spread duration with a target range of +/- two years versus the benchmark, with portfolio duration targeted at +/- one year around the benchmark.

Portfolio Manager

Joseph Mehlman

Head of Global Investment Grade Credit

22 years industry experience

Effective July 31, 2022, Stella Ma was added as portfolio manager on the Strategy.

RISK CONSIDERATIONS

Diversification does not protect you against a loss in a particular market; however it allows you to spread that risk across various asset classes.

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In the current rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. Longer-term securities may be more sensitive to interest rate changes. In a declining interest-rate environment, the portfolio may generate less income. Credit quality. Investments in securities rated below investment grade (commonly known as “junk bonds”) present greater risk of loss to principal and interest than investment in higher-quality securities. Mortgage-backed securities (MBS) are sensitive to early prepayment risk and a higher risk of default and may be hard to value and difficult to sell (liquidity risk). They are also subject to credit, market and interest rate risks. In addition to the risks associated with common stocks, investments in convertible securities are subject to the risks associated with fixed-income securities, namely credit, price and interest-rate risks. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. The risks of investing in emerging market countries are greater than the risks generally associated with investments in foreign developed countries. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance. When investing in value securities, the market may not have the same value assessment as the manager, and, therefore, the performance of the securities may decline.

This communication is only intended for and will be only distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Past performance is no guarantee of future results.

A separately managed account may not be appropriate for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Any views and opinions provided are those of the portfolio management team and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

All information provided has been prepared solely for information purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

OTHER CONSIDERATIONS

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

The Bloomberg U.S. Corporate Index is a broad-based benchmark that measures the investment grade, fixed-rate, taxable, corporate bond market.

“Bloomberg®” and the Bloomberg Index/Indices used are service marks of Bloomberg Finance L.P. and its affiliates, and have been licensed for use for certain purposes by Morgan Stanley Investment Management (MSIM). Bloomberg is not affiliated with MSIM, does not approve, endorse, review, or recommend any product, and. does not guarantee the timeliness, accurateness, or completeness of any data or information relating to any product.

The information presented represents how the portfolio management team generally implements its investment process under normal market conditions.

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.