Investment Process

Today, as never before, the world's capital markets are interrelated and interdependent. Political and social events play as significant a role in financial markets as economic factors. LM Capital Group utilizes a global, fundamental, macroeconomic approach to the fixed income markets. The investment process is augmented by the use of Global Scenario Planning, a structured, team based methodology that serves as a qualitative risk management tool to examine potential events and their impact on our portfolios. LM Capital's investment performance demonstrates that consistent application of this process adds value for our clients over the long term. LM Capital believes this process to be a suitable, long-term, conservative management style that responds to long-term fundamental trends. It is risk averse, yet globally comprehensive in nature.

I. Matrix Construction

LM Capital Group bases investment decisions upon economic fundamental analysis. The analysis begins with the concept that money is a commodity, whose price or interest rate, is governed by the laws of supply and demand. When the supply of money exceeds demand, the trend in interest rates should be down; therefore, macro-economic, political and international factors influence this equation. To achieve a consensus on the perceived direction of interest rates, the Investment Strategy Group uses a unique method to process this information by using a matrix composed of the following six crucial economic factors: Inflation, Employment, Trade Balance, Budget Deficits, International Influences, and GDP Economic Indicators.  The Investment Strategy Group also reviews additional economic indicators that impact the above factors. This analysis involves a thorough examination of the above indicators in the G-8 countries (excluding Russia) plus Australia and New Zealand and several Lesser Developed Countries on a quarterly basis with a one-year outlook.  The matrix analysis is based in principal on the work of Nobel Prize winner Wassily Leontief and has been refined for use in an investment process by Managing Directors Luis Maizel and John Chalker.

II. Trend Identification

By applying fundamental economic analysis, the Investment Strategy Group scores the matrix indicators on a numeric scale with a double weighting for Inflation and Economic Indicators.  Examination of the matrix assists in determining the most-attractive fixed income markets and aids in identifying capital flows between countries.  The Trend Identification scores determine how the portfolio will be positioned relative to the assigned benchmark with respect to average maturity, duration, sector allocation and within the constraints imposed by the client’s investment policy.

III. Portfolio Construction

The Trend Identification scores guide the portfolio positioning relative to the assigned benchmark with respect to average maturity, duration, and sector/country allocation decisions within the constraints imposed by the client’s investment policy. Duration management is the most important decision affecting the portfolio’s performance, closely followed by the sector/country allocation.  Portfolio managers generally employ a laddered maturity structure but may employ other structuring techniques such as “barbells”.

IV. Security Selection

LM Capital uses US Treasury, Agency, Investment Grade Corporate, and Mortgage Backed Securities in its domestic portfolios.  Non-dollar sovereign and corporate debt, US Dollar denominated Emerging Market Debt, and US High Yield securities may also be used in the Opportunistic Core (Core Plus) portfolio, if allowed by the client’s investment policy. The firm avoids the use of arbitrage, alternative debt and derivative instruments.

Individual security selections are based upon specific criteria developed by the Investment Strategy Group.  LM Capital uses screening techniques to help identify the types of securities that fit within the investment policy structure.  Bonds are evaluated on the basis of duration, convexity, call features, quality, yield-to-maturity and other factors to ensure that each security meets the client’s investment guidelines. 

Technical analysis is employed only after a decision to buy or sell a security has been made.  It is used to gauge current market sentiment and relative strength.  With this method, tactical market entry and exit points can be identified.

V. Situation Analysis

Once the initial portfolio allocation and construction process is complete, it is followed by a ‘what-if’ scenario planning stage that examines what market reaction may occur in response to unexpected future events, either political, economic or social. This allows LM Capital to be proactive in managing client portfolios in changing economic environments. Portfolio characteristics are reviewed with special attention focused on the average duration, maturity and sector allocation that would be appropriate for a one to three year holding period.  This investment approach minimizes trading costs.

LM Capital has two distinct features that are primary contributors to our competitive advantage and outstanding performance.  First, two of the three Investment Strategy Group members are foreign nationals.  This foreign viewpoint brings a unique understanding of the business, social, and political cultures abroad.  Second, LM Capital has always utilized a global approach towards the management of portfolios.  As globalization continues, investors have become more aware of the direct impact that foreign events have on US capital markets.  The investment professionals at LM Capital have studied and strategized these events since 1984, long before it became acceptable to embrace Opportunistic Core and global fixed income strategies. 

Sell Discipline

Aside from portfolio duration adjustments or sector reallocations, individual issues may be sold based upon changes in the security versus LM Capital's bond criteria. With this in mind, a change in credit quality, valuation or liquidity may trigger the Investment Strategy Group to sell a bond from the portfolio.

Although LM Capital spends a great deal of time exploring the impact of potential political, social and economic events through its Global Scenario Planning process, it does not make radical changes in reaction to near-term movements. LM Capital focuses on long-term investment trends.