Uncovering Hidden Alpha in Credit Selection

01 November 2024

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AB Core Score Model — Uncovering Hidden Alpha in Credit Selection

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

Will Smith, CFA| Director—US High Yield

For a deeper dive into this topic, read our blog, Core Score: How a New Approach to Credit Investing May Harness More Alpha.

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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.

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. Views are subject to revision 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

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

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Uncovering Hidden Alpha in Credit Selection

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