Global Fixed Income Research: A Perspective

Contributed by: Meera Siva

Chennai chapter of the IAIP conducted a speaker event about global fixed income research on August 22, 2014. The speaker, Balachander CFA, is the founder and Managing Director of JMN Investments Research. The firm provides offshore investment research services to the global financial services industry – equity and fixed income research and analytics services covering both fundamental research and technical analysis. Bala has over two decades of experience as a money manager in the United States. Prior to founding JMN, he served as Senior Analyst and Head of Credit Research at Waterstone Capital Management LP, a Minneapolis-based convertible ARB fund. Earlier, he was Senior VP at Payden & Rygel Investment Council, managing $10 billion of global bonds. Bala holds a MBA degree from the University of Iowa and a Bachelor Degree in Science from Loyola University in Chennai. He also holds the CPA designation and is a CFA charter holder. He has served as the India consultant for the CFA Institute between March 2007 and August 2011 and has been a grader for the last 16 years.

Highlights of the event:

As investors in India, our view of the fixed income market may be that of a small, low-risk segment where securities are not transferable and are held to maturity. But globally, the market is immense, with Governments being the primary issuers. Government bonds in the local currency are risk-free, as the authorities can print money to pay off their obligation. There are also bonds from local government institutions such as municipalities and corporate issuers. Additionally, financial institutions issue asset backed securities where there is a promise to pay a coupon and principal on maturity. The underlying can be diverse – credit card receivables, mortgages or auto loans.

Globally, bonds are not typically held to maturity, but professionally traded. For example, bond funds may bet on the credit rating of the company improving. This is especially true in the high yield market. Credit rating agencies play an important role in the market. They assess the ability and willingness of the borrower to repay the loan. Metrics such as debt-to-EBITDA, EBITDA-to-interest are used to evaluate interest and principal repayment capabilities.

Bonds and equity

How do bonds compare with equity when you analyze risk and returns? The downside risk for bonds and equity is your investment. But the upside is limited for bonds, compared to equity. Inflation is also a cause for concern when investing in bonds. In general, bond analysts focus on balance sheet and cash flow statements while equity analysts place emphasis on income statement. Bond investors get paid before equity stake holders when things go bad; but it does not mean that bonds are low-risk. So various instruments have been created to slice the risks into different buckets and package it to be suitable for investors with different risk profiles. For example, senior secured bonds have the lowest risk of default, but someone who wants risk exposure close to equities can opt for junior subordinated bonds.

If you are in fixed income research, you have to deal with a lot more maths, compared to equity research. This is especially true when analyzing asset backed securities where the risk and returns are structured to create multiple products. You also need to do option pricing analysis for callable and put-able bonds.

Career options

The small size of the Indian bond market may be a great career opportunity, as the market is set to grow. The market growth was 35 per cent CAGR between 2011 and 2013, touching a size of INR 3.5 trillion as of FY13. Also, most of the issues are in the high credit category and only 39 out of the 1,800 issues in FY13 had a rating of BB or below. The high-yield segment will likely see sizeable growth in the coming years as the Indian market matures.

The event was well received and the members and candidates gained a perspective on the size and flavour of fixed income market globally as well as the state of the industry in India.

 

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