Euro Corporate Bond Strategy with David Stanley

David Stanley – Portfolio Manager, Euro Corporate Bond Strategy

My name is David Stanley, I’ve been at T Rowe Price since 2003. I manage the T. Rowe Price Euro Corporate Bond Strategy, we invest predominantly in Euro-denominated corporate bonds.

Investment Process

Whilst I manage against a benchmark, I have the flexibility to invest in non-benchmark issues – these can be high yield, even high quality bonds such as covered bonds, as well as bonds denominated in non-euro currencies, in each case fully hedged back to the euro.

European companies will issue in other currencies, and quite often these bonds will trade at wider spreads than their equivalent euro-denominated bonds. This gives us the advantage of incremental yield without incremental risk – we can buy a foreign bond and hedge it back to euros, thus taking no currency risk.

Consistent outperformance

We’re trying to achieve long term consistent risk-adjusted outperformance. The key to success is getting the fundamentals right, working with a large team of very good and highly experienced analysts, avoiding and underweighting the underperforming credits. It’s also a matter of being flexible. Drivers of markets are constantly changing, the geographic backdrop is constantly changing, as are the influences, whether macro, global or sovereign.

Proprietary research

I work closely with investment grade analysts, who are specialists in their own sector. I also have the ability to work with a very large team of macro economists and portfolio managers, and our own internal sovereign analyst.

All the bonds we buy are internally rated by our analysts. This is our own internal proprietary research, they’re independent of ratings agencies. The analysts look at and assess credits, they’ll assign an internal rating and a recommendation. With that rating, I can then look at relative value analysis.

Our analysts are all experts in their fields, they know their companies and their sectors very thoroughly. They provide their own rating, and their own recommendation. It’s important that our analysts meet the companies that they invest in, they get a sense of the attitude of management. Obviously they can analyse the company’s returns and accounts but it’s very important to actually meet the management, and get a sense of their conviction, how debt-friendly and how supportive they are going to be to debt investors.

We found over time that our ratings tend to be more conservative than the ratings agencies – we look at a slightly longer term time frame – it gives us the ability to have our own independent view and not be swayed by external advice or recommendations.

Risk management

We seek to invest in bonds offering attractive yields given their risk profiles. It’s not a case of looking to increase or decrease risk, it’s assessing whether we’re being adequately rewarded for the risks that we’re taking. We try to overweight the outperformers, but we believe that long-term success is earned by avoiding the underperformers.

One of the ways we avoid the underperformers is by having this very large successful team of analysts to provide good credit recommendations and advice. We’re seeking to avoid one factor being the dominant driver of performance. We want diversified sources of alpha.

Risk management is integral. One of the most important risk tools is our research, where our analysts help us avoid the blow-ups and the underperforming credits. Diversification is also a very important risk tool and here we’ll look at diversification by name, by sector, by industry and by geography. We can also look at risk on an aggregate level where we’ll look at tracking error by various different factors in the portfolio – for example, we look at tracking error by investment grade, by high yield and even by geography.

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