Why it’s good when bond and equity managers collaborate

Fixed-income and equity portfolio managers may analyze and invest in the same companies.

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“The drivers of equity value are sometimes the same drivers of credit quality,” says Nicholas Leach, vice-president of Global Fixed Income and High Yield at CIBC Asset Management, and lead manager of the Renaissance High-Yield Bond Fund.

That’s why it’s useful for both bond and equity teams to work together, and to “share our different perspectives,” he says.

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Say a company wants to “increase its debt to make an acquisition or pay a special dividend,” Leach explains. “That may be good for the [company’s] equity price but it’s going to be negative for bond prices.”

In that scenario, fixed-income managers would understand the company’s bond “trust indentures and the restrictive covenants that [can] limit a company’s ability to engage in shareholder-friendly transactions,” he says. So, those fixed-income experts could provide insight to equity managers on the benefits and challenges of the company making such a move.

Read: Beware of bond covenants

Leach has also called upon his firm’s equity resources team for help when researching the credit quality of oil and gas companies. “It’s important to understand the quality of the [company’s] assets,” and to be aware of the oil plays occurring where the company operates. For instance, if a fixed-income manager were comparing MEG Energy and Baytex Energy, she’d need to understand the difference “in terms of where their operating assets are” to determine credit quality, says Leach.

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He notes that due to the higher level of issuer concentration within equity markets—in Canada, in particular—both equity and fixed-income analysts often “have a deeper knowledge of some of the larger equity issuers.” So, if equity analysts have a target price for a holding, “we can actually look at that, as bond holders, as being a cushion [for us]. We know our claims are ahead of the cash flow claims for equities.”

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