Oechsle International Advisors
Page 1
BACKGROUND
Oechsle International Advisors, LLC (Oechsle International) is the successor entity to Oechsle International Advisors, L.P., an international investment management firm that was formed and registered with the United States Securities and Exchange Commission (the “SEC”) in August of 1986 by a group of investment professionals who previously worked as a team at Putnam International Advisors. Oechsle International Advisors, LLC was formed and registered as an investment adviser with the SEC in October 1998. The founding principals of Oechsle International Advisors, L.P. have worked together for an average of seventeen years. Oechsle International currently manages in excess of $20 billion on behalf of institutional and individual investors and registered and unregistered investment companies throughout North America.
Oechsle International Advisors, L.P. began managing international portfolios for U.S. tax-exempt clients shortly after the establishment of the firm in 1986. The Oechsle International team, however, developed its management approach while at Putnam, initially applying their strategies to mutual funds (1973) and eventually to U.S. tax-exempt clients (1979).
Oechsle International Advisors, LLC (“Oechsle International”) is a Delaware limited liability company. Its Member Manager is Oechsle Group, LLC, a Delaware limited liability company. Four individuals, all of whom are involved in portfolio management, research analysis and/or administration, manage Oechsle International.
S. Dewey Keesler CIO & Principal/Portfolio Manager & Research Analyst
Stephen P. Langer Principal/Director of Marketing & Client Servicing
Sean Roche COO & Principal/Portfolio Manager & Research Analyst
Warren Walker Principal/Portfolio Manager & Research Analyst
An additional eleven members of the firm hold equity investments in the firm. 56% is owned by active employees. The remainder of the firm is owned by Fleet Financial Group, Inc.; Hellman & Friedman, a San Francisco-based investment banking firm; a member who retired in 1999; and a member who retired but is currently providing consulting services to the firm.
Oechsle International, headquartered in Boston, Massachusetts, has three additional research and management offices.
LocationFunction
BostonResearch, Portfolio Management, Trading, Accounting,
(headquarters)Legal / Compliance, Client Servicing, Marketing
FrankfurtResearch, Portfolio Management, Client Servicing
LondonResearch, Portfolio Management
TokyoResearch
International / Global Fixed Income
Investment Philosophy
Oechsle International Advisors believes that bond market returns are highly affected by currency trends. Therefore, to add value in the global bond markets, one must consider bonds and currencies to be at least of equal importance. The best way to identify investment opportunities is to combine country/currency decisions, active duration decisions and quantitative risk programs used as a control mechanism. This blend of disciplines leads to superior long-term performance.
Investment Style
We are research-driven bond managers, focusing much of our time on fundamental macroeconomic study of the world’s major bond markets. We actively allocate among countries and currencies, and utilize the complete spectrum of the yield curve. For example, when we’re positive on a bond market and its currency, we will invest in long-dated maturities. The less positive we are, we purchase shorter-dated, less volatile issues. We also seek to reduce the overall risk in the portfolio by:
- diversifying across a number of markets;
- hedging unwanted currency exposures during times of base currency strength;
and
- applying quantitative techniques.
Investment Process
Our investment process begins with extensive fundamental research on the macroeconomic environments of global fixed income markets. This research effort relies on both internal and external resources. Our Frankfurt-based fixed income team, led by Astrid Vogler, head of global fixed income, coordinates its research activities with our research offices in London, Boston and Tokyo. The fixed income team is in regular contact with its associates worldwide discussing capital market conditions. The fixed income team provides the equity team with valuable insight on how currencies and interest rates impact equity markets and the equity perspective is very useful for the fixed income team. These teams meet on a formal basis each quarter and communicate informally on a more frequent basis.
Our team also accesses external resources, such as government officials, central bankers, brokers and other major financial institutions. We firmly believe in meeting with these people face-to-face, and travel extensively to witness market developments first-hand. Frankfurt is a particularly strategic location for global fixed income investing, as many of the world’s major bond markets are located in Europe and thus highly accessible. Also, it’s relatively easy to deal both with the Far East and North America during working hours.
Our research focuses on variables that drive currency and bond movements, such as the rate of inflation, government budget balances, trade balances, monetary policies, and general economic conditions of the individual countries. The objective is to determine consensus thinking on the markets and identify where our thinking deviates. This is where opportunities for incremental returns originate.
The objective of our macroeconomic research is to identify key trends within individual markets and across markets. The primary trends we focus on relate to interest rates and the U.S. dollar.
1. Interest rates: Obviously the main factor in fixed income investing. The key determinant here is the rate of inflation. The outlook for inflation rates often defines markets as attractive or unattractive. We focus on markets with attractive real yields (bond yields less inflation) and positive inflation trends. A good example in the past was Japan. Here is a market that had low absolute bond yields, yet had an attractive inflation scenario, causing rates to drop even further, and bond prices to rise.
It is not the level of interest rates that is important, but rather the direction of interest rates and the level of inflation. The best scenario for bonds is declining rates and stable or declining real yields. We rank markets according to their likelihood of realizing this optimal scenario. Again, it is important to look at our expectations vs. consensus expectations, and identify where we differ.
2. The U.S. dollar: The U.S. dollar is the world’s most dominant currency and the primary reserve currency closely followed by the deutsche mark and yen. All major currencies are measured relative to the dollar. Thus, it is critical to watch factors within the U.S. that impact the dollar: economic growth, rate of inflation, and trade balances with America’s major trading partners. The key is analyzing these factors with those of other countries, as this is what helps impact the movements of the dollar vs. other currencies. Our currency committee carefully follows events which might impact movements in the dollar. Identifying trends in currencies provide us with a significant opportunity to add value to our clients’ portfolios.
Once we’ve identified trends in interest rates and the dollar, returns are estimated and the appropriate allocation to countries’ bond markets and their currencies is determined. Allocations are set quarterly on a formal basis, but can be altered at any time should conditions warrant.
An important element of the allocation decision is setting the ideal duration for each market. Duration is a function of maturity. Thus, we must determine where along the yield curve it is optimal to invest. The further out in maturity, the more optimistic our outlook for a drop in yields and a rise in prices. We take full advantage of all liquid maturities. The duration of bonds in the portfolio may be 10% - 200% of the benchmark’s duration.
Although our process is predominantly qualitative, we do, however, apply quantitative techniques in the country/currency allocation process to ensure that the structure of the portfolio represents our current views, and does so within the risk guidelines of the benchmark. All quantitative techniques inherently suffer from the fact that they are based on historic data. However, such techniques can assist by imposing discipline and consistency onto the process.
The technique we use is referred to as “reverse optimization.” Under this procedure, our country and currency weightings and the historic risk data of each market are entered. The output is implied market returns. These returns are then compared to our expected returns, and adjustments are made as we see necessary. This technique is non-traditional, and as such, it overcomes a good proportion of the limitations commonly associated with traditional optimization techniques.
After taking the recommendations of this tool into consideration, the asset allocation of the portfolios is then set. Typically we invest across 8-12 markets, and typically follow the criteria set out below:
Major market weightings: +/- 50% of index weighting
Other markets: no single market more than 12% of the portfolio
The goal is to provide adequate diversification across markets to reduce risk, yet to concentrate on those markets and currencies that we think offer the best potential for incremental return.
In order to implement our asset allocation strategy, issue selection becomes important. At this stage, we focus on the type of security we wish to purchase. This is typically a government bond, but can also be a government agency issue, supranational, mortgage debt, or corporate debt, and can be of varying coupons. The tenet we adhere to most strictly is credit quality: no bond rated below single-A (very high quality) as per Moody’s or Standard & Poors, the most reliable rating services in the business is included in the portfolio. We also pay careful attention to diversification and liquidity: we typically hold 20-40 issues in the portfolio, we do not hold more than 5% of any one issue, nor do we purchase a security that was part of an issue of less than $500 million. Again, the goal is to implement our strategy with conviction, but to do so in a risk-conscious manner.
Should any client have specific restrictions, we review those at the security selection level. We pay close attention to client concerns, and are flexible in accommodating their particular requirements. Should a client want to establish guidelines outside of the ones under which we typically operate, we would be more than happy to discuss accommodating them.
In evaluating where we seek to add the most value, we focus on the country/currency decision. The duration (yield curve) decision ranks of equal importance. Security selection within our above-mentioned framework is of secondary importance.
Sell Disciplines
We look to sell issues, currencies and/or markets when one or more of the following events take place:
1. Rising interest rates: typically a result of rising inflation, bonds’ worst enemy;
2. Tightening monetary policy: results in higher rates; and
3. Base currency strengthening.
Currency Hedging
A significant contributor of return and risk in the global fixed income markets is currency. We will hedge for both strategic and tactical purposes. Strategic hedging is done defensively back into the client’s base currency during periods of base currency strength. Tactical hedging is done opportunistically to add value in the form of cross hedging: hedging between two currencies, neither of which are the client’s base currency.
We only use forward contracts to implement our currency hedges. These instruments are the most liquid traded in the world. 3 to 6 month contracts are most commonly employed. We find it unnecessary to implement our strategy through the use of futures and options. Outside of forward contracts, no derivative instruments are used in our process.