Strategic Income Strategy

Overview
Investment Approach
Portfolio Managers

Overview

Strategy Facts

Capability:	Fixed Income
Strategy Inception:	December 2014
Benchmark:	ICE BofAML 3-Month T-Bill Index

Strategy Facts

Capability:	Fixed Income
Strategy Inception:	December 2014
Benchmark:	ICE BofAML 3-Month T-Bill Index

Summary

The Strategic Income Strategy seeks a positive absolute return by investing primarily in fixed income securities across a spectrum of asset classes including high yield bonds, investment-grade bonds, mortgage and asset-backed securities and convertibles. The strategy’s unconstrained approach provides the flexibility to allocate across these fixed income sectors and seek the best ideas through bottom-up security selection globally. The team seeks to construct a portfolio with less sensitivity to interest rate movements and the potential to capture positive returns across varying interest rate environments.

Investment Approach

Philosophy

The team believes that markets can be inefficient and by performing rigorous analysis, the team can position portfolios appropriately to add value over time. Bond prices reflect market forecasts for a variety of factors, such as economic growth, inflation, monetary policy, credit risk, and prepayment risk; yet markets tend to be poor forecasters of future events, especially when the implied market forecasts are out of line relative to historic trends. They seek to identify these mispricings and position client portfolios to exploit the value inherent in these opportunities.

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

Global Perspective
A Value-Driven Processs
Diversified Holdings
Deep Fundamental Research

Differentiators

Unconstrained

The team's active approach provides not only flexible asset allocation between the sleeves of fixed income, but also the ability, via bottom-up security selection, to own what they believe are the best bonds in each segment while avoiding the idiosyncratic risks inherent in a passive approach.

Interest Rate Management

There’s a climate change taking place in bonds right now—the three-decade secular decline in interest rates appears to have ended—and it’s time to consider a shift from passive to active strategies. Unconstrained management techniques enable the team to better diversify risks and reduce exposures to movements in interest rates, which tend to be the primary source of return volatility.

Risk Mitigation

A well-balanced portfolio with exposure to a diverse range of fixed income asset classes is an important start, but it’s not enough to ensure uncorrelated returns or appropriate diversification. By managing risk at every stage of the process and paying close attention to the correlations between asset classes, the individuals risks within the portfolio can be blended optimally to decrease the overall risk of the portfolio and ensure no single risk dominates.

Right-Sized

Since the financial crisis, liquidity and inventories have been reduced due to stricter regulations. This restricts the ability for very large funds to hedge risks and limits their investment opportunities. The team believes a portfolio now needs to be “right-sized” to maximize investment-return opportunities.

Investment Process

Macro Analysis:

The team seeks to determine what themes are driving asset prices across rates, countries and currencies and to evaluate the investment opportunity set based on a thematic investment thesis. The top-down process uses a combination of fundamental and quantitative analysis to identify and evaluate these investment opportunities.

Asset Allocation:

The Asset Allocation team is led by Michael Kushma, the CIO of the Global Fixed Income team and is comprised of the heads of each research group. The team seeks to first, identify areas where implied market forecasts are out of line relative to historic trends and second, to identify the catalyst for the market to adjust. Internal debate is a key feature of our investing philosophy, ensuring investment ideas are tested thoroughly. The team debates relative value across sectors and determine broad strategy targets.

Research:

The team's approach to fixed income investing uses a disciplined investment process and a commitment to research. Research is conducted by dedicated teams specializing in a particular niche of the fixed income market. The research teams use in-depth fundamental analysis, complemented by quantitative tools, to generate bottom-up investment ideas and are responsible for security selection.

Portfolio Construction and Risk Management:

Portfolio managers are responsible for implementing the investment strategies. They work to construct each portfolio in a way that conforms to individual client/strategy guidelines and objectives, while staying true to the broad strategy targets that are set by the Asset Allocation team. The portfolio managers achieve these targets by working with the research analysts to fill the sector buckets with bottom-up security selection ideas.

The team views risk management as an integral part of their investment process. Based on this belief, portfolios are protected against a variety of risks through diversification, credit risk protection, and liquidity with the goal that no single risk dominates the portfolio.

Trading:

All fixed income trades are executed by centralized Global Fixed Income trading desk. Central dealing segregates the trading function away from the decision making process, and allows the portfolio managers to focus on managing the portfolio. This procedural separation ensures that all accounts are structured according to the parameters established by the team.

Global-Fixed-Income-A-Disciplined-Investment-Process_1000px_FINAL-2

Portfolio Managers

Michael B. Kushma

CIO, Broad Markets Fixed Income

37 years industry experience

Leon Grenyer

Head of European Multi-Sector

28 years industry experience

Effective November 1, 2022, Leon Grenyer was added as a Portfolio Manager for this strategy. Effective October 31, 2022, Jim Caron no longer serves as Portfolio Manager. Effective December 1, 2023, Vishal Khanduja was added as Portfolio Manager on the Strategy, and Chris Roth is no longer serving as Portfolio Manager.

Effective 30 August 2024, Richard Ford is no longer serving as Portfolio Manager on the Portfolio.

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 portfolio. Please be aware that this portfolio 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. High yield securities (“junk bonds”) are lower rated securities that may have a higher degree of credit and liquidity risk. Some U.S. Government securities are not backed by the full faith and credit of the U.S., thus these issuers may not be able to meet their future payment obligations. Mortgage-and asset-backed securities 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. 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. Sovereign debt securities are subject to default risk. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance. Restricted and illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk).

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 ICE BofA ML 3-Month T-Bill Index is an unmanaged market index of U.S. Treasury securities maturing in 90 days.

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.