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a little goes a long long way

Omar Gadsby takes a less-is-more approach in his role as head of fixed income fund selection at Credit Suisse. By Will Jackson


Almost nine years later, he heads a five-strong global fund selection team for the group, consisting of dedicated bond specialists in Zurich, Singapore and London.

The expansion, he notes, reflects the additional resources needed to cover the asset class – given the significant increase in both market issuance and product complexity.

“I have been lucky in many respects, to be a fixed income fund selector in the past 10 years,” says Gadsby, who previously led the bond fund ratings research function at Standard & Poor’s in London. “There was the most dramatic change in fixed income, across all asset classes: enormous issuance of corporate bonds, expansion of corporate bond sectors; the development of credit default swaps.

“Emerging market debt used to be dollar sovereign bonds. Now the local currency market is 10 times larger than the dollar market, and there has been significant growth in emerging market corporate bonds – both investment grade and high yield.

“The $1trn [€740bn] transfer from equities to fixed income in the five years following the 2008 crisis significantly broadened the solutions landscape.”


Job title: Head of fixed income fund selection, Credit Suisse Private Banking & Wealth Management, Zurich

Omar Gadsby was born in the UK and lived in Barbados until the age of 16, when he moved to the US. He gained a BBA in Finance & Economics from Drexel University in Philadelphia, before starting his career in 1995 as a currency trader for the fixed income team at Merrill Lynch in Princeton, New Jersey.

After Merrill Lynch, he completed an MBA at Imperial College in London, where he conducted research on Russell Investments, a manager of managers, for his thesis, ‘Offshore investment funds – a new paradigm in investing’.

“[Russell] highlighted that there are more managers than stocks, and that stuck with me,” Gadsby says. “I thought manager selection would be an interesting area to pursue, because it would become increasingly important for private banks, insurers and pension funds to capture the right manager.”

The revelation prompted his move to Standard & Poor’s in 2001, as a senior fixed income fund analyst – a role which required him to travel throughout Europe, meeting managers and issuing fund ratings.

“Lots of that included coming to Switzerland and I was essentially headhunted by Credit Suisse in 2005. Since then, I have built and managed the buy-list for fixed income funds.”

So, which is home: Zurich or Barbados? “Barbados – especially at this time of the year, I miss it.”

To guide Credit Suisse’s advisers through the vast array of bond vehicles available, Gadsby’s team boils down the fund universe to just 120 products – the so-called ‘strategic fund master list’ – and then further, to a ‘lead offering’ of 40 products.

“The funds that feature on the lead offering list directly match our research opinion today,” Gadsby explains. “We’ll have a great government bond fund on the master list, for example, but our research [indicates we should be underweight] government bonds.

“So you will not find a European government bond fund on the lead offering list. As a bank, we generate probably 80% of our revenues from 25% of the funds we recommend. So we embrace a less-is-more philosophy. And there we really focus on the funds that matter.”

Eyes on the prize

The master list represents a lucrative prize for fund providers – given that Credit Suisse runs wealth management assets of some CHF800bn (€650bn), of which more than 10% is held in mutual and exchange-traded funds (ETFs).

With fixed income strategies accounting for about half the company’s fund investments, Gadsby’s team adds new products to the list only if they are expected to feature consistently in the top-quintile of their respective peer groups.

To identify such reliable outperformers, Gadsby first employs quantitative screens to assess risk characteristics such as volatility, standard deviation and maximum drawdown; as well as alpha attributes including the information and Sortino ratios.

“We focus on capturing more asymmetric risk profiles in the quantitative screen,” Gadsby says. “Being a private bank, capital preservation is critical.”

Funds with a range of share classes – offering access to currency or duration-hedged overlays, for example – and which can be distributed throughout Europe and the majority of Asia, are favoured.

Finding the flair

On the qualitative front, Gadsby seeks managers with a distinct approach. “The attribute I’m really looking for in a fund manager is flair,” he says.

“And flair in identifying a clear research thesis which should enable his or her fund to outperform over the medium term. Templeton Global Bond, for example – I’ve covered that fund for 10 years.

“The research thesis is very simple – combining developed market government bonds and local currency emerging market government bonds in a portfolio. It’s a smart idea. If you build a portfolio that is comprised typically of 50% developed, 50% emerging markets, you are likely to outperform a developed market index. And they have.”

Other funds that pass Gadsby’s flair test include Alliance Bernstein RMB Income Plus, the Julius Baer Local Emerging Bond and Absolute Return Bond portfolios sub-managed by GAM, and a frontier markets strategy run by Global Evolution – a Danish boutique acquired by Saxo Bank in 2009.

“The Global Evolution Frontier Fixed Income product is wonderful. These guys address a significant problem in emerging market debt investing – that the large issuers are totally integrated into developed capital markets. Mexico, Brazil, Russia, South Korea – all of these economies are highly-correlated to developed capital markets. And [in 2013] the expectation that the US would taper its quantitative easing impacted the currencies of many of these countries.

“But in the frontier markets, you have strong issuance in Nigeria, Vietnam and Serbia; and their bonds are lowly-correlated. This is a thesis that has been expressed in the fund, and it has worked well. It’s positive year-to-date [November 2013], versus negative returns for the majority of other emerging market debt funds.”

Gadsby began monitoring the fund at launch three years ago, and added it to a mandate in 2012. However, it was not until the strategy had acquired a two-year track record that Credit Suisse’s relationship managers began recommending it to clients, in 2013.

Leading from the front

While Gadsby notes that deep markets such as US high yield require a collective approach, clear ownership of the investment process is key – a characteristic exemplified by Julius Baer Local Emerging Bond manager Paul McNamara, who he says remains “hands-on and completely engaged with the fund”, despite the growth of his team.

“So, can I find good managers? Absolutely,” Gadsby adds. “It’s interesting to identify managers with specific attributes: those who manage duration or credit exposures aggressively, or who manage derivative overlays actively, and so deliver absolute returns.

“GAM, manager of the Julius Baer Absolute Return Bond Fund, is a strong example of that. GAM has excelled at complementing a bond portfolio with an active derivative overlay. The resulting returns have been characterised by low volatility, even in rising interest rate environments.”

The attribute I’m really looking for in a fund manager is flair. And flair in identifying a clear research thesis which should enable his or her fund to outperform over the medium termalt=''

Omar Gadsby
Head of fixed income fund selection, Credit Suisse Private Banking & Wealth Management

With US tapering underway and developed world interest rates at all-time lows, such attributes are likely to prove particularly attractive in the years ahead.

Gadsby says Credit Suisse is working on ways to prepare investors for the end of the great bond bull-run, and will shortly implement an educational campaign called ‘The Fixed Income Challenge’.

“We have been in an environment of falling yields for 25 years, and last summer gave us the first real glimpse of what could happen. Normally, clients do not expect to lose money in fixed income. But the quarter ending 30 September was the first where they looked at their statements and asked: ‘Why is my bond fund down?’

“It has become critical for us to address this. For me, the past five years was about selecting the right products. The next five years is all about advice – helping clients to preserve capital and essentially to rebalance their portfolios sensibly.”

Beyond the traditional

One of Gadsby’s biggest worries is a corollary of the massive issuance which made fixed income such an exhilarating sector for investors during the past decade.

Both governments and corporations took advantage of depressed interest rates to refinance their high-coupon debt with low-coupon debt, and to extend their maturities – thereby creating a situation where the most indebted issuers have the biggest weightings in fixed income indices, and longer durations pose significant price risk.

As a result, Credit Suisse is seeking to move its clients away from traditional bond benchmarks.

“The new products we are introducing are more flexible, more absolute return-orientated,” Gadsby explains. “We are focusing on the high income sector – funds that can implement high yield, investment grade, emerging market debt and convertible bonds in one portfolio; and which can aggressively reduce duration.

“You want funds that can deviate materially from the benchmark, and that have high tracking error.”

Don’t do things by half

Given ETF providers have launched so-called smart beta products designed specifically to combat the benchmark flaws he describes, shouldn’t fixed income investors save themselves some money and pursue a ‘semi-active’ approach to the asset class?

Not so, Gadsby argues. While ETFs are “wonderful for expressing tactical opinions” in government debt, he expects passive corporate bond strategies to suffer in line with the market as default rates rise, owing to their regular rebalancing.

“Remember that a high yield bond always has a recovery to the market value of the asset, after default,” Gadsby adds. “An active manager can own that recovery, but an ETF will often sell the bond at its lowest point – so ETFs are not going to be your ideal solution. I am confident I can find active managers who can outperform ETFs, let’s put it that way.”

By helping Credit Suisse’s clients avoid the worst of any downturn in fixed income markets, Gadsby hopes to repay the trust they have invested in him.

“Objectivity stands at the top of our process,” he says. “We are indifferent to in-house funds – we just want to ensure we provide the best solutions across the fund universe, to our clients.

“That’s why, coming out of the crisis, we’ve continued to have stable participation in our funds. Because our clients know they get objective advice from internal specialists.”