Morgan Stanley puts fixed income portable alpha webcast online

31 May 2007

For those readers who have been emailing us looking for more information on portable alpha in the world of fixed income investing, you’re in luck.  Morgan Stanley has made a recent presentation and accompanying conference call recording available to readers of AllAboutAlpha.com via Morgan Stanley’s AllAboutAlpha Research Dossier (once logged in, go to the bottom of the “research” page to view the webcast).

The call is hosted by Jack Coates who heads up Morgan Stanley’s Portfolio Architecture team.  Before joining the firm, he was the managing director of Weyerhaeuser’s Pension Fund Investment Group.  Portable Alpha enthusiasts will know his name since Weyerhaeuser pioneered portable alpha investing well before it was all the rage.

Coates provides a methodical overview of portable alpha beginning with its rationale and culminating with its potential to increase returns or reduce volatility.  He explains how portable alpha can play a critical role in increasing allocation to fixed income. Says Coates:

“When I ask a plan sponsor about fixed income, very often the answer is ‘It’s because I can’t figure out how to get high enough returns from fixed income’.  When I then say ’Have you thought about portable alpha - and getting an additional 3 % returns?’ a typical answer will be ‘Well, then I would love fixed income.’”   

Other points covered in the webcast include what has changed to make fixed income portable alpha more attractive today…

“In the past, the swap market for fixed income betas can be described as immature or undeveloped.  The volume of transactions was low, and beta choices where mostly restricted to US treasury indices.  So credit exposure was difficult to obtain.  In addition, there was not a broad universe of counterparties willing to enter into transactions - and when you found one, swap costs were high. 

“Today, however, the fixed income swap market is very much improved.  There are many more hedging instruments.  For instance, derivatives of the CDX Index offering credit exposure and mortgage TBA’s offering mortgage exposure are widely available.  Also, there are more dealers offering different indices.

“The bottom line is that the ability to obtain exposure to fixed income benchmarks is improving and we believe will continue to improve.”

The presentation continues by getting into the mechanics of fixed income portable alpha.  While they are obviously bullish on fixed income portable alpha, they provide the following caveat:

“The key to the trade is that the alpha engine needs to beat the financing rate.  Otherwise there is no or negative alpha transported to the benchmark.”

The web-enabled presentation goes for about 30 minutes and is followed by about 20 minutes of Q&A including this insightful one that we hadn’t thought about before:

“If I need to find an alpha engine that beats LIBOR consistently, then should I look for one that has a positive correlation to LIBOR?”

When asked if some fixed income portable alpha strategies will “effectively end” if short term rates go up, Coates gave an interesting response.  He acknowledges that the mechanics of portable alpha would come under pressure in this scenario, but he says the alpha engines themselves might actually experience higher returns.  “It depends on the specific situation”, he says.  

Readers with a soft-spot for fixed income will find this particularly useful.  But even if you think fixed income is for propeller-heads, you’ll probably find this nifty self-advancing slide presentation intriguing.

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One Response to “Morgan Stanley puts fixed income portable alpha webcast online”

1. norman carton Says:
   June 2nd, 2007 at 10:31 am

   This whole approach depends upon the alpha engine making enough to cover all the costs. Why don’t Morgan Stanley, or you, present the same approach with some real figures attached for all the management and other fees, together with the core fact, the pre all costs rate of return that the alpha generator has to achieve.