“Amgen’s treasury team was looking to optimise the risk/return profile of our investment portfolio while at the same time increase yield,” says William Lundberg, Director of Capital Markets & Investments. “Fixed income investing has become especially challenging in a low rate environment,” he continues. As such, William and Luis were concerned about how low the ‘income cushion’ was in market value weighted bond indices (eg Barclays Aggregate).

Problem…

“The income cushion is the amount interest rates can increase before offsetting the coupon income and producing a total return of 0%,” explains Luis Arrieta, Head of Investments. “Five years ago, for a one-five year government/credit strategy, that income cushion was 210 basis points; today, it stands at just 39 basis points. This made us reluctant to increase the yield of the portfolio by simply extending its duration.”

“In addition to this,” says William, “the macroeconomic environment is more uncertain today than it has been in recent history. The US may already be in a double dip recession, the Eurozone appears to have no viable solution to its problems, and China has the potential for a hard landing.” Being a corporate investor, Amgen needed a solution that provided downside protection, flexibility for potential large uses of cash, and controlled volatility.

William and Luis’ top five rules for high yield corporate investors

1. Know your short and long term liquidity profile – would you have a problem holding to maturity?
2. Constantly question your high yield manager about security selection, refinancing risk, covenants, etc. Favour companies with hard assets and high liquidation values.
3. New issue concessions boost returns – be sure your maturity guidelines allow for purchases of new issues.
4. Ensure senior management is well informed at all times – how bad can things get? Look at history, use judgment, keep an open mind.
5. Keep a relative value mindset – look across all asset classes within your portfolio.

…Solved

“We explored several sectors of the fixed income market to find an asset allocation that would enhance the yield of our portfolio while making sure the risks associated with doing so could be managed carefully,” says Luis. Amgen partnered with different investment firms, including the Liquidity Management team at DB Advisors, the global institutional asset management business of the Deutsche Bank Group, and determined that the high yield sector of the fixed income market was a viable option, given its attractive yields and historical low correlation with investment grade bonds. However, given the conservative nature of corporate investors, a customised solution was needed.

“The exposure to high yield in the overall portfolio is relatively small; we limit our investments in high yield bonds to no more than 5% of the total,” says William, “with this in mind, we decided to work with the High Yield Team of DB Advisors to develop a ‘high quality’, high yield mandate suitable for the needs and constraints of Amgen.” DB Advisors and Amgen determined that the sweet spot given their objective and risk tolerance was to invest in the BB/B space of the high yield universe. “Among other things, we liked the relatively low level of defaults experienced by BB/B issuers and what appears to be an attractive risk/return trade driven by the fact that many institutional investors are not permitted to invest in bonds rated below investment grade (BBB). This market segmentation phenomenon may allow some investors to find high yield bonds at very attractive prices,” says Luis.

With this in mind, DB Advisors helped Amgen construct a portfolio of high yield bonds with relatively short duration and a high quality bias. The yield of this portfolio is five times greater than the yield in their investment grade portfolio of similar duration. “We understand there’s going to be more volatility in this sector, but we believe this is an attractive trade that will benefit our overall portfolio returns in the long run,” says William.