ESGB - Adam Abbas' Fixed Income Market Commentary - Q1 2024

2024-04-09 09:20:00 ET

Summary

• We are value investors. In constructing portfolios for our clients, we seek out companies that we believe are trading in the market at significant discounts to their underlying value. These businesses must offer significant profit potential and be run by managers who think and act as owners.
• We believe in the importance of intensive, fundamental research. Our research process is based on a disciplined quantitative and qualitative screening process.
• Short-term events like the Federal Reserve’s actions, inflation trends and economic growth metrics seldom affect the foundational aspects of the long-term investment landscape.
• Regardless of whether inflation remains at 3% or reverts to 2%, the long-term investment outlook for fixed income remains positive. Periods of high volatility are more often precursors to higher future returns.
• Fixed income can act as a shock absorber in a downturn and provide higher income in a stable-rate environment – which enhances the expected returns.

Fixed income: Beyond the noise - A data-first approach

When I was starting out at Lehman Brothers, I found out a certain famous bond investor ignored the daily financial news that I, as a new analyst, was told to follow closely. This puzzled me initially, considering how much the media drives the market. But I eventually understood why. As I progressed in my career and increasingly leaned into long-term value investing, I understood why the renowned bond investor chose to ignore the daily financial noise, recognizing it as a potential distraction rather than a benefit. Today, the daily news churn pores over the Fed's moves, inflation and economic growth. While these are important short term, they don't really shake the long-term investment ground.

Take, for example, whether the Fed cuts rates in June or August, or if the CPI slightly changes; neither will drastically alter the long-term outlook for bonds. These details help predict market trends or price discovery in the short term, but they should never be allowed to eclipse the larger, long-term investment picture....

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