For a deeper dive into this topic, read our blog, Core Score: How a New Approach to Credit Investing May Harness More Alpha.
TRANSCRIPT:
Tiffanie Wong: Investing in the credit markets has become a lot more complex and difficult. You think about the growth of the market: there are almost 20,000 bonds across global investment-grade and high-yield credit universes. So security selection can be quite daunting and time consuming.
Will Smith: Our journey of security selection has brought us to what we call the Core Score, which is our way of combining quantitative research and fundamental research. And we think that’s an incredibly powerful combination because they both do different things really well.
TW: Quantitative research can give us that breadth of coverage. It can cover a lot of different securities across nearly the entire credit market. Whereas fundamental research can give us that depth of research. So the fundamental research consists of our credit analysts’ views of the range of credit outcomes, whereas the quantitative portion combines all of our research into predictive factors.
WS: The other thing I think is so powerful is that quant is based on really backward-looking data, whereas fundamental research is really all about forecasting the future.
TW: Exactly, and if you can combine them well, we think it can actually provide a more reliable and persistent source of alpha in security selection. It allows us to be a lot more dynamic in our security selection as well. Markets are moving very quickly, and we also have to react real time to market pricing changes as well as changes in our research views.
WS: It’s a great point, Tiff. Because if we look at credit sell-offs, for instance, over the last few years, they happen really quickly. And so if you’re waiting for a bunch of humans to look at a bunch of data and say, oh, we should buy X, Y and Z and sell A, B and C, you will have already missed the opportunity. So digitizing the entire research platform and creating the Core Score—which gives you all of those opportunities at your fingertips immediately, based on pricing—gives us a huge advantage.
TW: Yes, and really, it’s to the benefit of our client portfolios. This gives us a higher probability of generating alpha through security selection.
WS: The key for us is that this is repeatable and scalable. What that allows us to do is not necessarily forcing us to take big industry or single-name concentrated bets that are really tough to get right; instead, what Core Score does for us is it identifies a lot of pricing inefficiencies over time that accumulates. It’s kind of like snowflakes in a snowstorm, and eventually you have a whole lot of snow accumulation.
