How we Invest
Kapstream’s portfolios are designed to deliver the attributes investors seek most from a defensive fixed income allocation: capital preservation, liquidity and consistent income generation.
Our Approach
We aim to deliver significant returns above cash over the cycle, while maintaining low volatility and manage drawdowns. Our track record since 2007 reflects this: very few and modest drawdowns relative to other asset classes, returns relative to peers and benchmarks, and ample liquidity for investors to have access to their funds when needed.
As an autonomous boutique subsidiary of Janus Henderson Investors, we combine the focus and accountability of a specialist manager with access to the broader resources of a global investment house, including dedicated fixed income trading, risk management, and corporate credit research teams.
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Our Investment Process
Our investment process is built on a structural foundation, that is then actively managed through top-down macro positioning, bottom-up security selection, and standalone alpha generation. Each layer of the process is designed to contribute to returns while operating within defined risk and volatility constraints.
Structural foundation
Over-the-cycle assessment of what combination of credit and rates delivers the highest return with the least risk
Top-down macro positioning
Fundamental macro research drives cyclical positioning around the structural foundation
Bottom-up security selection
Granular analysis of country, currency, curve, sector, issuer, and liquidity characteristics drives security selection
Standalone alpha ideas
Focus on uncorrelated and idiosyncratic alpha
Structural Foundation
The structural foundation, combining credit and rates exposures, is the centrepiece of our process and represents our “north star”, the average portfolio positioning we hold over a full market cycle. It is optimised through quantitative analysis to deliver most of our return target without breaching our volatility and drawdown limitations.
In practice, this means maintaining credit of approximately three years maturity alongside approximately one year of rates duration. This combination has historically produced around 150 basis points of excess return with approximately 100 basis points of volatility, a balance we consider optimal. An exposure to longer-dated credit would be expected to deliver higher returns, but only at the expense of breaching our volatility ceiling and acceptable drawdown experience during times of crisis. A smaller credit holding, such as an average two-year maturity exposure, would deliver lower returns with reduced volatility, but place increased pressure on the other layers of the process to meet the overall return target.
The combination identified produces outcomes that best support our objectives – much more so than traditional fixed income benchmarks that are based on issuance outstanding rather than the return and volatility combinations they produce.
Top-Down Macro Positioning
Kapstream actively manages rates and credit spread duration, generally within a range of approximately plus or minus one year around the structural foundation, positioning the portfolio for medium-term trends within the business cycle. The sensitivity to rates tends to be increased during periods where yields are expected to fall, due to influences such as a recession, and reduced when yields are expected to rise, such as during bouts of high inflation. Similarly, credit spread sensitivity is lowered when there are concerns that credit spreads are too tight and may widen, but will be above average when spreads are high and expected to recover. These adjustments can be complemented by shorter-term tactical positions where warranted.
Bottom-Up Security Selection
Security selection adds a further layer of return generation through issuer and instrument level decision making. In credit, this involves choices across country, currency, industry, and individual issuer. In rates, it extends to the part of the yield curve and the region. In this way, Kapstream is a truly global short-duration manager, searching for the best reward-for-risk opportunities that can be incorporated into the portfolio.
Our new issue selection process combines fundamental credit analysis within a broader relative value assessment. We leverage long standing relationships with issuers and joint lead managers to achieve strong allocations to well performing deals, and our track record demonstrates outperformance over time in spread compression relative to the broader market.
Standalone Alpha Ideas
A standalone alpha generation sleeve, operating with a more limited risk budget, is an additional contributor to returns. These are uncorrelated strategies that seek to exploit relative value opportunities across rates, foreign exchange, and credit markets.
Liquidity Management
Our liquidity management framework, enhanced following the experience of the COVID pandemic, ranks every holding into four tiers depending on how liquid each class of securities is during times of stress. Kapstream seeks to maintain a liquidity sleeve of 15% to 30% of the portfolio, comprising cash, term deposits, commercial paper, and short duration investment grade bonds. This is sized to withstand severely stressed outflow scenarios.
Additional contingencies include a diversified panel of eight repo counterparties and a committed liquidity facility of approximately 10% to 15% of the fund’s net asset value. These are primarily used for liquidity purposes rather than returns, helping to provide liquidity when investors need it, including during times of stress in financial markets.
