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value bonds represent companies whose quality is believed by the investor to be better than the higher interest
rates theyre forced to pay. It takes some searching to recognize these inefficiencies, but they do happen and
sometimes in striking patterns. Value bond investors look for these sweet spots constantly.
Also helping patient U.S. bond investors were new rules starting in 2005. This is when the U.S. Financial Industry
Regulatory Authority imposed requirements for bond trade reporting that evened the pricing playing field
among the big and smaller players in the market. Called Trade Reporting and Compliance Engine (TRACE), it
essentially required all bond dealers to report prices and whether they were buying or selling, which wasnt
even required before. (The Ontario Securities Commission published a comprehensive report on the Canadian
bond market in October, 2014. The Canadian Fixed Income Market identifies current transparency standards
and pending changes by the Investment Industry Regulatory Organization of Canada, or IIROC, to support
improvements.)
TRACE was a huge game changer for investors in U.S. bonds. It gave wider access to prices, which previously
were privy only to the select few involved with the transactions. With price, youre on your way to determine
value separation more effectively.
Another helping hand to value fixed-income investing was the U.S. Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank). As banks were forced to strengthen their capital requirements, many
dealers reined in their risk profiles by divesting much of their corporate bond inventory. Inventories shrank
dramatically, which flooded the market with corporate bonds. Yet, dealers didnt want them. Shrinking
inventory creates pricing volatility. When prices dip and yields spike in the short term, it creates buying
opportunities for long-term managers focused on fundamentals. Value bond pickers can take full advantage of
that.
You wont see value bond investing everywhere. Although it dates back to 1930s Graham & Dodd principles,
value fixed income is not your conventional bond fund strategy.
The value fixed income strategy is transparent, so investors typically know what they own. Its not an array of
5,000 bonds, swaps, currencies and other alternatives. Rather, it pursues its mandate with a select group of
about 70-90 undervalued corporate bonds.
Value fixed income doesnt make macro calls or bets either. So, like its value equities cousin, value fixed income
will take on its own appearance relative to the index. Moreover, the playing field is levelling through TRACE,
while the banking industrys general abhorrence of risk under Dodd-Frank keeps most U.S. bonds (other than
investment grade) off their books, so that they can get into the waiting hands of the market. Thats great for
value bond hunters in the United States, who are more than happy to take a look, and while theyre at it, the
other side of the issuers balance sheet too.
Bridgehouse Asset Managers is a trade name of Brandes Investment Partners & Co. (Bridgehouse). Brandes Investment Partners is a registered trademark of Brandes
Investment Partners, L.P. in the United States and Canada, used under license by Bridgehouse. Brandes Investment Partners & Co. is an affiliate of Brandes Investment Partners,
L.P., which is a portfolio sub-advisor to certain of the Bridgehouse Funds. Brandes Investment Partners & Co. operating as Bridgehouse Asset Managers (Bridgehouse) is the
manager of the Bridgehouse Funds. Bridgehouse has hired Brandes Investment Partners, L.P. (Brandes LP), Greystone Managed Investments Inc. (Greystone), Lazard Asset
Management (Canada), Inc. (Lazard) and Sionna Investment Managers Inc. (Sionna) as portfolio sub-advisors in respect of the Bridgehouse Funds.
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