Value-risk methodology of fixed-income king

Manager of last year’s best-performing preferred share fund explains his approach

Value-risk methodology of fixed-income king

Evolve ETFs CEO Raj Lala excitedly described Ryan Domsy as “a find”. And it takes only a quick Google to confirm that the Foyston, Gordon & Payne money manager was responsible for last year’s best-performing preferred shared fund.

The FGP Preferred Share Fund, which is also the sub-advisor for the Evolve Active Canadian Preferred Share ETF, returned 22% - not that Domsy takes much notice of the league table.

Heavily invested himself, he insists his priority is not topping the charts but being an effective steward for clients’ capital. One suspects the 34-year-old has had few complaints so far but he admits there is expectation.

He said: “You always feel that pressure because we are in a returns-driven business. Our view is that you are not always going to be able to be the number one fund based on a total return metric but the number one job is to really be stewards of capital for our client.

“What we really need to do is be willing to give up some of that performance to make sure we are delivering the overall risk levels in the portfolio that we promised, so there is always pressure but we you have to make sure we push that aside.”

He admits that sometimes causes friction with clients who feel they are missing out on upside … until a company “blows up” and they are shielded from the losses.

At the heart of this is Domsy’s methodology of finding what every investor is seeking: undervalued securities based on the amount of risk.

Brought in to build out Foyston’s credit expertise in 2010, the operation has grown significantly.

He said: “We developed as a team with a much greater focused credit risk and we created a very robust process valuation framework in order to deal with the unique attribute of the fixed income market.”

He said: “Risk is the number one input. Essentially our goal is that we identify risk and when we compare that to the market pricing, it gives us the ability via valuation methodology to identity which securities our undervalued, fairly valued or overvalued.

“And then we can create a portfolio of securities that are undervalued based on the risk profiles of the securities, and that is really the two main points to it.”

Domsy said his interest rate forecast is more modest than the likes of Bloomberg and does not predict major hikes in Canada, although he expects the curve to steepen a little.

The biggest challenge, he said, in the fixed income space, is that credit spreads tighten dramatically. He believes people are not getting paid for the risk they are taking on in their portfolio.

He said: “They are taking high exposure to the high yield space and getting exposure to companies within every segment of the fixed-income market and by doing that and not getting compensated appropriately, I think a lot of people are setting portfolios for potentially stock scenarios because there will eventually be a widening of credit spreads and you need to be prepared for that.”

He added that as rates go up, bonds are going to have a hard time getting robust returns so advisors need a strategy to offset some of that risk and focus on capital preservation. This can be done, he said, by keeping your duration lower than the market and adding complementary assets to your fixed income portfolios.

He said: “Adding convertibles or preferred shares to your fixed income so it has better correlation in interest rates and is likely to see positive returns in a rising rate environment. And you are able to buy companies that have a very high credit quality.

“Preferred shares are dominated by companies that carry investment credit ratings and you are able to get beyond what you would be getting from similar bond instruments but you are doing it while staying in companies that have lower credit risk. So you can use attributes like that to protect the portfolios.”