Core Score: How a New Approach to Credit Investing May Harness More Alpha

September 19, 2024

3 min read

Tiffanie Wong, CFA| Director—Fixed Income Responsible Investing Portfolio Management; Director—Global & US Investment-Grade Credit

Timothy Kurpis, CFA| Portfolio Manager—US Investment Grade Credit

Will Smith, CFA| Director—US High Yield

Historically, investors have struggled to add meaningful alpha through security selection. A dynamic new credit scoring approach could change that.

Given the breadth and diversity of the corporate credit universe, hand picking individual securities can be inefficient. That’s why we’ve developed a powerful new scoring methodology that systematically harnesses quantitative and fundamental research to generate new sources of outperformance (alpha).

Size of Bond Universe Makes Security Selection a Challenge

The credit market’s complexity and sheer scale underscores the challenges of generating alpha through bond selection. The global corporate universe comprises nearly 20,000 securities, which can make security selection both time-consuming and overly subjective. Partly for this reason, many portfolio managers aren’t able to generate much alpha from security selection, and instead lean more on levers like beta timing and sector rotation.

We believe that’s a missed opportunity. In any market—but especially today’s—security selection has the potential to generate meaningful alpha. Historically, the heightened volatility and desynchronization between interest-rate regimes that we’re seeing now has contributed to increased dispersion and idiosyncratic opportunities at the issuer and security levels.

Fortunately, in our view, investment managers can generate potential alpha by combining quantitative methods with bottom-up fundamental research. The challenge lies in efficiently converting vast quantities of data into better investment outcomes.

Our approach systematically funnels both fundamental and quantitative inputs into a proprietary scoring model that ranks bonds by their attractiveness. We call this a “core score.”

Here’s how it works.

Balancing Fundamental and Quantitative Inputs

At the heart of the core-score methodology is traditional fundamental research. Credit analysts conduct thorough due diligence of issuers and securities, and assess various outcomes for each bond—including a base case, an upside case and a downside case. This range of outcomes is then used as a part of our fair-value model to determine a bond’s attractiveness relative to current market pricing. This informs the fundamental score for each security.

The second part of the process involves quantitative research. Analysts filter bonds through various predictive factors with demonstrable links to historical outperformance, such as momentum, relative value or default probability. Once securities are assessed through a factor lens, each bond is assigned a quantitative score that reflects our quantitative research team’s view of its attractiveness.

The fundamental and quantitative scores are then combined. The result is a single core score for each bond (Display). The core score informs our understanding of a bond’s return potential relative to its risk and allows portfolio managers to consistently implement our best ideas in client portfolios. We believe this increases the probability of generating alpha from security selection.

Core Score Combines Quantitative and Fundamental Research

Visual depicting core-score methodology, including a combination of quantitative and fundamental research

For illustrative purposes only. There can be no assurance that any investment objectives will be achieved.
Source: AllianceBernstein (AB)

A Powerful Tool for Today’s Global Credit Market

What makes the core score so powerful?

There’s no substitute for sound fundamental research, but the enormity of the global bond market also requires a quantitative process that provides breadth of coverage. Our core-score model makes research more scalable and targeted—allowing us to make informed decisions about many individual securities. Ultimately, we believe that consistently identifying many mispriced securities with strong risk-adjusted return potential is a smarter way to manage bond portfolios.

And because our methodology is data driven, it’s efficient and effective—not unlike daily exercise that provides incremental benefits that add up over time. The core score is refreshed daily for each bond in a benchmark index—including existing and new issues. That’s significant, as there can be more than 40 tranches comprising dozens of new issuers on any given day in the US investment-grade market alone, to say nothing of the volume of global issuance.

Less visible to investors is the flexibility the core score provides—including more time for analysts to engage with issuers* to gain unique, forward-looking insights, and the ability to respond to market pricing shifts more dynamically. This is especially important in today's fast-moving market, when it’s critical to capture opportunities that might otherwise be missed.

While a core score makes sense in any market, we believe it’s especially relevant given today’s global credit backdrop and increased volatility. In our view, investors can’t afford to miss out on idiosyncratic opportunities as they arise. As we see it, the core score could provide opportunistic investors with a powerful new tool for harnessing alpha.

*AB engages issuers where it believes the engagement is in the best interest of its clients.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

About the Authors

Tiffanie Wong, CFA

Tiffanie Wong is a Senior Vice President and Director of Fixed Income Responsible Investing Portfolio Management. In this role, she is part of the leadership team that develops responsible investment strategy across AB's Fixed Income business, particularly related to integrating environmental, social and governance considerations throughout the team's portfolio construction processes and overseeing management of several of the team's sustainable strategies. Wong also serves as Director of Global & US Investment-Grade Credit, responsible for the management and strategy implementation of the firm's Global & US Investment-Grade Credit portfolios, including total-return and income-oriented credit strategies for institutional and retail clients. She has worked closely with AB's Quantitative Research team to leverage the firm's technology innovations within fixed-income trading and research to apply a more systematic approach to AB's credit investing. Prior to joining AB's Fixed Income portfolio-management team, Wong served as an associate portfolio manager on the Credit team, focusing on various strategies for the Global and US Credit portfolios—including total return, buy and hold, and liability matching. Before joining AB in 2012, she was a fixed-income portfolio analyst and trader at Segall Bryant & Hamill and a fixed-income portfolio associate at Wells Capital Management. Wong holds a BA in economics with a minor in business institutions from Northwestern University and is a CFA charterholder. Location: New York

Timothy Kurpis, CFA

Timothy Kurpis is a Senior Vice President and Portfolio Manager for US Investment Grade Credit. In this capacity, he is responsible for the management and strategy implementation of the firm’s US Investment-Grade Credit portfolios, which include both total-return and income-focused strategies for institutional and retail clients. Kurpis is also a member of our Responsible Investing and Canadian Fixed Income portfolio-management teams. He has partnered with AB’s Quantitative Research and Technology teams to leverage the firm’s technology innovations within fixed-income trading and research to apply a more systematic approach to AB’s credit investing. Prior to joining AB’s Fixed Income portfolio-management team, Kurpis served as head of Investment Grade Credit Trading and head of London Trading. He spent four years in AB’s London office from 2014 to 2018, building out the firm’s European trading capabilities. During his time in trading, Kurpis was instrumental in the build-out of AB’s industry-leading trading tools, including ALFA and AbbieX, as well as pioneering new trading protocols such as portfolio trading. He joined the firm in 2010 as a rotational associate. Kurpis holds a BA in economics with a minor in mathematics from Gettysburg College and is a CFA charterholder. Location: New York

Will Smith, CFA

Will Smith is a Senior Vice President and Director of US High Yield Credit. He is also a member of the High Income, Global High Yield, Limited Duration High Income, Short Duration High Yield and European High Yield portfolio-management teams. Smith designed and is one of the lead portfolio managers for AB’s Multi-Sector Credit Strategy, which invests across investment-grade and high-yield credit sectors globally. He leads the monthly High Yield portfolio-construction meeting, and is a member of the Credit Research Review Committee, which determines investment policy for the firm’s credit-related portfolios. Smith has authored several papers and blogs on high-yield investing, including one on the importance of using a probability-based framework to build better portfolios. He joined AB in 2012, and spent 2014 in London as part of the European High Yield portfolio-management team. Smith started his career with UBS Investment Bank, working as an analyst with the Credit Risk team and then later on the Fixed Income sales and trading desk. He holds a BA in economics from Boston College and is a CFA charterholder. Location: Nashville

Core Score: How a New Approach to Credit Investing May Harness More Alpha

Size of Bond Universe Makes Security Selection a Challenge

Balancing Fundamental and Quantitative Inputs

A Powerful Tool for Today’s Global Credit Market

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