Riti Samanta, co-head of North America fixed income and systematic fixed income portfolio manager, at Russell Investments discusses the impact that market uncertainty is having on fixed income markets and what liquidity signals her buy-side desk is paying close attention to as part of its systematic strategies.
In this episode, she looks at how her team is trying to deliver alpha and relative value, using quantitative strategies and in a tight credit spread environment.
Samanta also unpacks how Russell Investments measures implementation costs versus alpha; she looks at the necessary trade-offs to consider, and unpacks how technology can be used to optimize trading and investment strategies.
Finally, the North American head outlines one piece of advice she would offer traders trying to operate in the current headline-driven and market-sensitive environment.
Full Interview
Jo Gallagher Welcome to Trader TV This week, your insight into how trading desks can prepare for the week ahead, I’m Jo Gallagher. Today I’m joined by Riti Samanta at Russell Investments to discuss the main topics and events leading up to this week. Riti, welcome to the show.
Riti Samanta Thanks a lot, Jo.
Jo Gallagher There is a lot of global uncertainty right now, and unpredictable policy changes. How are you seeing this impact fixed income markets and what liquidity signals are you paying close attention to?
Riti Samanta Our team at Russell, we manage broad fixed income portfolios. We allocate to all sectors of fixed income. We allocate to external managers, and we manage money ourselves with strategies that we have developed and implemented in -house. So there’s complexity in that and when I think about the uncertainty, I really think about three things that impact the portfolios directly.
One is rates volatility. So when you look at something like the Move Index, you know, implied volatility in bond markets. Those numbers were close to 80 right after the election. That number now is sitting closer to 110. So it’s really secularly moving in one direction.
The second thing I pay attention to is credit spread. So a lot of our portfolios have a significant focus on credit spread naturally. So the fact that credit spreads are now extremely tight, we’re sitting below five-year median levels in both US IG (investment grade) and US high yield. Does mean that you have to be thoughtful about how you’re going to extract alpha opportunities from your credit sector. And then the third thing that’s going on is the correlation between duration risk and credit risk, which is often seen to be a negative correlation. They’re supposed to kind of diversify one another, credit risk and rate risk in a broad portfolio. That is in many times turning positive. And that’s something that we also pay a lot of attention to because that impacts the overall portfolio risk and the expectation that certain aspects of your portfolio are going to diversify one another.
Our strategies and our portfolio construction is systematic in nature, meaning that we use quantitative tools to build a portfolio to think about risk attribution and to think about risk management. And these three aspects, rates, volatility, tight credit spreads, and that correlation have to play into how we think about portfolio construction. The second point you were making is around liquidity and liquidity costs.
There [is] one thing I like to pay attention to is actually talking to our traders about how the lower quality credits are performing in the market and trading in the market. I see them often a little bit like a canary in a coal mine. Investors in those sub-sectors of credit are actually looking for a illiquidity premium. They want to be compensated for taking less liquid assets. And so if they’re asking to be compensated at higher levels, that actually gives you a signal that maybe there’s something going on, that’s an important signal to kind of bring into the discussion.
Jo Gallagher As you mentioned, credit spreads are very tight right now. So how do you create quantitative trading and investment strategies that deliver alpha and relative value?
Riti Samanta You do have to look under the hood at all of the different sectors of fixed income. So just to level set here, if you think of something like the US AG, you’re looking at a third securitized credit, a third corporate credit and a third Govies (Government bonds). Numbers are a little bit different, but essentially that. And within each, you can actually find opportunities in this environment.
So if you look at securitized credit, securitized credit is largely floating rate instruments. What that means is that in an environment where we have high or uncertain inflation, teams and investors who have real skill in that area that are able to generate alpha from that space, also because this is a relatively lower duration asset class. So you get some of that rate immunization. You know, you’re a little bit less sensitive to rate volatility. So that’s an interesting space.
The second is corporates. We manage corporate credit both systematically and with fundamental approaches. And I find both to be actually quite rewarding and quite effective in this space. So systematic strategies tend to find a signal that they’re then differentiating between one credit and another. And they do that by kind of looking for relative value. almost irrespective of what the overall level of spreads are. So that’s an important feature of systematic strategies because they are able to control all other portfolio risks and find relative value between two bonds or between two issuers that otherwise have certain comparable qualities but are different because of some fundamental pricing that is going on that is different in the market for those.
Fundamental managers equally have their skill set in the space. So if they’re operating in new issue markets, or if they’re operating in sectors, and they have the understanding and the skill to say, how are tariffs going to differentially impact certain companies versus others within a sector, they’re able to bring that information and uncover opportunities in that way.
Then the third area is Govies. And Govies are becoming interesting again, because we’re starting to see more and more divergence in some ways across the different markets. This was a world where everybody was going into negative real interest rates for a long while and now that you start to see some divergence, you actually have the opportunity to do relative value between developed market rates or emerging market rates.
So each sector is actually presenting itself in quite a fruitful way right now if you’re able to kind of look under the hood and find the right opportunities there.
Jo Gallagher And so how do you measure implementation costs versus alpha in your systematic strategies?
Riti Samanta Yeah, that’s a critical trade off, right? Because alpha is that transfer core efficient. That ability to actually trade those bonds at a reasonable price is the source of the alpha, along with of course the signals and all the design that’s gone into it.
Understanding what is the break -even cost of a strategy is a really important discussion that we have with our team all the time, which is when you look at a systematic strategy, at what level of cost is there no alpha left in the strategy? And then you have a conversation with your traders to say, hey, is this cost something that could happen very frequently in the sector of fixed income? Is it very unusual? You know, help me understand what those levels kind of look like.
The second thing that helps here is technology. So one of the things we’ve spent a lot of time at Russell developing is the ability to actually re -optimize these portfolios in real time.
So essentially allowing our traders and portfolio managers to incorporate real-time costs, so liquidity costs, sourceability, is a bond available or not, and bring that right into the portfolio design in real time, re -optimize that portfolio, and that becomes what is implemented.
Jo Gallagher What’s one piece of advice then you would offer traders operating in this current environment?
Riti Samanta I would give anyone the advice that I give myself every morning, which is some version of, you know, staying humble and staying curious, and also staying very disciplined in the way that we approach our portfolio management decisions.
So one of the things I like about having a systematic process in place is that you build a straw man that is actually bringing together kind of your best insights, your best data, your best expertise on how you think about portfolio construction. And then when something changes in the world, which of course it does, you’re able to interrogate the model and say, hey, what’s that assumption that went into the model that’s different from what we’re seeing in the world today? Is it that duration and credit have actually become very positively correlated? And that’s different from what I had assumed. Or is it that a manager is underperforming relative to what I’d expected, or our strategy is not doing as well as what we had tested when we built it up, because our trading costs and our liquidity cost assumptions were not correct.
So all of that conversation happens in a really crisp and clear way once you have that guide post in front of you. And I think that’s the discipline of the process. So I would say that this is an environment that is uncertain, but it isn’t one that we’ve never seen before. We have lived through some pretty extraordinary times. And I’m sure the next time will be extraordinary. But having that discipline to have the conversation, get very crisp-eyed about what’s the assumption that’s changed, make the portfolio management choices and decisions that you need to make. monitor them, attribute them, and then bring in that new information and adapt to it. So that’s the process we all follow as a team. And I think we rely on that to be able to navigate through all of these types of uncertain environments.
Jo Gallagher Thank you Riti for your insight and of course you for watching. I’d also like to thank everybody that came out to the Noddies last week, the guests, the sponsors, and the whole Markets Media team. This has been Trader TV This Week.
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